The importance of young ag producers saving for retirement

Developing the habit of saving at a young age and learning how to invest your money wisely provides valuable options at retirement.

Chris Nolt

The advantage of investing early

There are huge advantages to begin investing at a young age. To illustrate this, I give you the following example. If a 25-year-old invests $5,000 per year until age 35 and then stops (10 years, $55,000 total invested) versus a 35-year-old who invests $5,000 per year until age 60 (25 years, $130,000 invested).

Assuming a constant 8 percent rate of return, the person who starts at age 25 reaches age 60 with a balance of $615,000, and the 35-year-old who invests more than twice as much ends up at age 60 with $432,000. That’s nearly a $200,000 difference.

I often hear people complain about how they can’t afford to save money. These same people are sometimes purchasing $4 coffee drinks on a daily basis. If a person were to save $4 each day for 30 years at 8 percent, that money would grow to $181,227 over 30 years.

Retirement plan options

Qualified retirement plans offer beneficial tax treatment. You should try to maximize your contributions to these plans each year. Choosing the right type of retirement plan is an important decision. Many options exist, including traditional IRA, Roth IRA, SEP IRA, simple IRA and 401(k).

For those producers who don’t have employees, a solo 401(k) is a great option. A solo 401(k) does not have the high costs associated with traditional 401(k) plans and allows a business owner to contribute up to $53,000 per year ($59,000 if older than age 50) on a tax-preferred basis.

Of this money, $18,000 ($24,000 if older than age 50) can be contributed into a Roth 401(k). Unlike the Roth IRA, the Roth 401(k) has no income limitations for those investors who want to participate. The advantage of a Roth IRA and Roth 401(k) is: The money not only grows tax-free; it can be distributed tax-free during retirement as well.

Investment options

How you invest the money in your retirement plan (and outside your retirement plan) is a critically important decision. You want to make your money work hard for you.

The stock market is a great place to grow your money long-term. Large U.S. stocks have grown at an average annual rate of 10 percent since 1926. Small U.S. stocks have grown at an average annual rate of 12 percent. The average investor, however, experiences returns much less than this. There are many reasons for this, which I don’t have room to discuss in this article.

Deciding how to invest today can be difficult considering the thousands of investment options that exist and the amount of information available on how to invest, much of which is contradictory. For most people, investing in a globally diversified portfolio of low-cost, index mutual funds or exchange-traded funds is a smart way to go.

If you are young and saving for retirement, close to 100 percent of your money should be in stock funds. Once you come up with the right portfolio, don’t make the mistake of shifting your money in and out of the market based on when you think the market is going to go up or down.