Mike Causey

Investing From Day One

When should you start planning for retirement? Most of the pros tell Senior Correspondent Mike Causey the second day on the job is about the right time, and a h...

Federal News Network Staff

June 24, 2008 4:00 am

3 min read

Today is the first of a 3-part series on investing for retirement. It is aimed at both the youngest and oldest feds. And folks in between. The series was written by financial planner Arthur Stein who agreed to fill in for me while I’m on vacation.

Here’s Part One:

Start Your Investment Habit Now
By Arthur Stein

When you’re young and just starting to make money, the last thing you may want to think about is retirement. But in reality, there is no better time to start setting money aside systematically in the Thrift Savings Plan (TSP), an IRA or directly with a mutual fund company.

In the beginning, it’s not critically important how much money you invest. What matters is that you start a retirement savings habit as soon as possible and keep investing regularly. There are four reasons why this is one of the smartest financial decisions a young person can make.

Reason #1 – The Power of Tax-Deferred Compounding

If you are 25 years old, you might not think it matters much whether you start saving now or next year. But by the time you reach retirement age, the cost of procrastination can be huge. For example, a 25-year-old person who sets aside $2,000 per year in the TSP and earns a 7% return will hypothetically build a nest egg of $427,219 by age 65. But if this person delays starting the program by just one year, it will be worth about $30,000 less.

The funds in your TSP compound on a tax-deferred basis without any current income tax consequences. That’s an attractive tax situation for investing long-term.

Reason #2 – It Doesn’t Cost a Dollar to Save a Dollar

Do you worry that you can’t afford to save in a retirement plan, because you need to spend the money on something else? The truth is – it won’t cost you as much out-of-pocket as you save, because you receive a current tax break for money contributed to the TSP.

For example, suppose you pay federal and state income tax at a combined rate of 30%. If you put $1,000 into the TSP, you reduce your taxable income by the same amount, resulting in $300 less tax paid.

Reason #3 – Matching Is Powerful

For FERS employees, the federal government matches the first 5% of contributions. That’s like getting a quick 100% return on your savings. Also, you begin to build compound earnings on the whole amount. This is a powerful reason to start saving now.

Reason #4 – Habits Are Hard to Break

At first, it can be tough to live on less current income every month, because you are contributing to the TSP. But after a few months, you won’t even miss the money. Putting money into your retirement plan steadily is one of the best financial habits any person can start at a young age.

Don’t be afraid to talk to a financial professional about the best way to set up your retirement plan savings program and its investment strategy. You can start your savings habit without having to make the investment decisions alone.

Arthur Stein is a Registered Representative of and offers securities and investment advisory services through MML Investors Services, Inc. Bethesda, MD 20814 (301) 657-7770.

Tomorrow: being prepared for retirement, and beyond.

Nearly Useless Factoid

From those wonderful people at MentalFloss comes this tidbit: The Red Phone (the hotline between the White House and the Kremlin) is tested hourly with the Pentagon sending a message every even hour, and Moscow sending a response every odd hour. The U.S. operators are fond of sending recipes for chili and magazine articles, while the Russians respond with excerpts from Dostoyevsky novels.

Mmm, chili.

To reach Mike once he returns from vacation: mcausey@federalnewsradio.com

To reach Mike’s (non-vacationing) editor and factoid composer: skubota@federalnewsradio.com