The Power of Compound Interest

What are the two words that every investor loves to hear? Compound. Interest.

Unlike simple interest, which is calculated only on the principle (amount of money you put in), compound interest accrues on the principle and your previously-earned interest. To put it simply, compound interest allows you to gain interest on your interest, thus creating a “snowball” affect with your money.

Some retirement accounts, such as Roth IRAs, allow you to earn compound interest on your investments. This makes it absolutely vital to start investing as early as possible in order to maximize your nest egg. No matter what stage of life you are in, the best time to start saving for retirement is now.

You may think that you don’t earn enough money to make a significant impact, but you are wrong. The amount of capital you start with is not nearly as important as when you start. Every year you push off investing can really hurt you in the long run.

To illustrate the power of compound interest, let’s take a look at two different investors: Ashley and Bill:

• Ashley opens her retirement account at the age of 25, and saves $5,000 every year through age 35. Her total contributions equal $50,000.
• Bill waits until age 35 to open his retirement account, but contributes $5,000 annually until age 65. His total contributions equal $150,000.

Now, who do you think ends up with more money by the time they both reach age 65? Assuming both earn a steady 7% return rate, here is what they end up with:

• Ashley’s final balance is $602,070.
• Bill’s final balance is $540,741.

Despite investing three times as much money as Ashley, Bill still ends up with less money because he waited longer to get started. This simple example illustrates not just the power of compound interest, but also why it is so important to start saving early.

Don’t wait any longer – speak with a financial advisor today about retirement. The consultants at American Investment Planners, LLC offer professional retirement planning services to individuals of all ages. Please call (516) 932-5130 to schedule an appointment with one of our advisors, or email info@americaninvestmentplanners.com.

Traditional IRAs vs. Roth IRAs

An IRA, or individual retirement account, is essential for anyone planning for retirement. The two main types of IRAs are Traditional and Roth. Both of these options offer their own distinct advantages, and the one you choose can significantly impact your long-term savings.

In this article, the retirement professionals at American Investment Planners, LLC will highlight the similarities and differences between the two types of IRAs, so you can decide which one is best for you.

What’s the Same?

Traditional IRAs and Roth IRAs have a lot in common. At a foundational level, they are both designed to help individuals save for retirement. Both accounts have a maximum contribution of $5,500 per year, or $6,500 if you are 50 years or older. Both types of accounts also offer tax advantages, which brings us to our next point...

What’s Different?

The single biggest difference between Traditional and Roth IRAs is when you can take advantage of these tax advantages. Traditional IRAs offer tax-deductible contributions, while withdrawals are taxed at ordinary income rates. Roth IRAs, on the other hand, provide no tax advantages on contributions, but withdrawals are tax-free (as long as you avoid early withdrawal penalties). To simplify this, Traditional IRAs offer tax advantages now, while Roth IRAs offer them during your retirement.

For this reason, Roth IRAs are generally suggested for younger people, or those who have just made a career change, since they will likely be in a higher tax bracket in the later stages of life.

Other key differences include income limits, contribution age, and minimum required distributions. Your income level does not affect how much you can contribute to a Traditional IRA, however Roth accounts are subject to income limits. You can contribute to a Roth IRA at any age, however Traditional IRA contributions must stop when you reach age 70½. Lastly, Traditional IRAs require minimum distributions each year after you turn 70½; Roth IRAs do not.

Still unsure which type of IRA best meets your individual needs? The financial consultants at American Investment Planners, LLC are available to answer all of your questions.

To schedule an appointment with one of our advisors, please call (516) 932-5130 or email info@americaninvestmentplanners.com.

The Benefits Of A Roth IRA Account

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What is the first type of savings plan that you think of when you hear the word "retirement?" If you're in the working world, we bet that a 401(k) is usually one of your first thoughts. After all, as a type of account that is often available to employees and highly recommended, 401(k)s are certainly a savings strategy that should not be ignored when given the opportunity to participate in one. 

But what about other means of saving? Have you ever given any thought to a Roth IRA? By definition, Roth IRAs are nondeductible IRA accounts that allow tax-free withdrawals when certain conditions are met (income and contribution limits apply). And aside from the fact that they permit withdrawals on a tax free basis, these accounts also offer tons of flexibility, easier access to money, and allow you to leave money behind without penalties. Now let's look at these benefits more in depth:

Flexibility: After reaching 70 1/2 years of age, retirees are required to withdraw from their 401(k) and traditional IRA accounts - and not without an income tax we might add. In fact, there are even penalties for not withdrawing as expected! However, when it comes to a Roth IRA, there is no annual withdrawal required, which ultimately allows retirees to withdraw at their discretion - not when others say they must.

Accessibility: Should a retiree need to withdraw money from a traditional IRA account before the age of 59 1/2, a 10% penalty for early withdrawal is applied to the transaction - and that's in addition to the income tax that is already being taken out. Though early Roth IRA withdrawals are also subjected to income tax and penalties as well, they are only applied to the part of the withdrawal that is taken from earnings (keep in mind, however, that the account must be at least five years old). That means greater accessibility to money with less penalties accrued for the account holder!

Usability: Where traditional IRAs require a person's successors to pay taxes on the money left to them during the withdrawal process, Roth IRAs often present the opportunity for tax-free withdrawals. Furthermore, since they do not necessitate that retirees must begin withdrawing as they get older, they allow individuals to leave money in their account for as long as they live. Therefore, if the retiree has money that they don't plan to use in their lifetime, they can keep it safe in their Roth IRA account for years until their family members or other beneficiaries are ready to take it out.

If you're beginning to think about retirement and retirement planning, considering a Roth IRA could very much benefit you and your family for years to come. Are you ready to learn more?

For more information about Roth IRA accounts and the retirement planning process, connect with the team here at American Investment Planners LLC today! Our experts can provide you with a savings strategy that carries your family for generations and generations. To get started, please give us call at (516) 932-5130.