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Chapter 4. Your Best Chance at Retiremen... > Individual Responsibility - Pg. 41

Your Best Chance at Retirement Is Your 401(k) If you are not willing to go for a higher rate of return on your money, you must save more to get back to the same place. Many people have told us they are very confused when it comes to making investment decisions. They don't know what to do, so they pick what they consider "safe investments." Just remember that every decision you make has consequences, including the decision to be uneducated when it comes to managing your money. If you take the "safe" road to reaching your goal, it's going to cost you a lot more money to get there. 41 But when we're older and more experienced, is it easier to save? Our research shows that it is considerably more difficult to save as you get older, because of things like a wedding, a new home or apartment, new furniture, kids, a new car .... The list goes on and on. After all, there is always something that we "need" today! And, like John, we wake up one day. Maybe we're turning 40 or 45, maybe we're in our 50s. We realize we have only about 10 to 20 years, maybe even less, before we want to retire. So, we decide, "Okay now, I'm ready to start saving for my retirement." Then we get the bad news. We've let time become our enemy. It now is working against us and the cost of waiting becomes all too obvious. This very simple chart tells us something very important about managing our money. We call it the oil-filter phenomenon, because people who save a little money by not replacing their oil filter as recommended end up paying a lot for engine repairs. Planning for retirement, or for any financial goal, is a pay-now-or-pay-later proposition. Start paying when you're young, and the cost of your goal is very small and quite reasonable. In fact, if you start early enough and you set aside a certain percent of your pay, moving toward your goal becomes less and less expensive as you get older and earn more. But wait even just a few years and your goal becomes increasingly expensive. Wait long enough and you'll never retire. Time is a powerful weapon if you use it. Every decision we make has consequences, including the decision not to commit to a decision. There are consequences if you decide not to participate in a 401(k) plan, or not to understand that there is no such thing as a riskless investment, or not to take the time to calculate what you should be saving in your 401(k) to reach your goal. Many people confuse the terms saving and investing . Thanks to the "experts" in the investment community who use these words interchangeably, the public thinks these two terms are the same. They are not. You first save it, then you invest it. You cannot invest what you haven't saved. And if you don't invest it, you end up with only what you've saved--which will decline in value through the years. Likewise, many people think they can reach their financial goals purely by picking the right invest- ments. The problem for most Americans is that we don't save enough and invest wisely. In order to reach a financial goal, you must develop answers to two very important questions: · How much should I save? · What rate of return should I get on my money? Both questions must be asked and answered if you are to reach your financial goals. Here's another way to look at the advantages of saving early and the pain of waiting. In the next figure, our young couple, George and Maria, have different attitudes about saving for their future. Both are age 20 and both have their future ahead of them. Because she read The Complete Idiot's Guide to 401(k) Plans, Second Edition, Maria decides to save $2,500 each year for 10 years. George, on the other hand, says, "I'll wait, I'm young and have plenty of time." (Sound familiar?) So he saves nothing.