Friday, August 15, 2008

A guaranteed instant 100% return - really!

Generally, when you see advertisements for investments that will double your money you should probably stay away.  Get rich quick schemes just don't work.

However, most Americans do have an opportunity to earn a 50-100% return on retirement savings.  If your employer offers a 401(k) plan, a 403(b) plan, or a Thrift Savings Plan and offers to match your contributions, you should at the very least invest enough to obtain the full match.  Period.  Doing anything else is very literally turning down free money.

Even if your employers plan has high-cost investment options or investments that you don't particularly like, if you can get free money by participating, it is almost impossible to do better with another investment.

Let's say that you make $50,000/year and your employer will match your contribution - dollar for dollar, up to 5% of your salary.  That means that you need to contribute $2,500 per year in order to receive the maximum $2,500 contribution from your employer.  If your investment grows at an average of 8%/year, and you contribute every year for 40 years, when you retire your investment will be worth almost $1.4 million!  Without your employer's matching contributions, you would need to earn an annual return of nearly 10.5% in order to achieve the same amount of money after 40 years.

If you are eligible for an employer sponsored retirement plan with employer-match contributions and you are not yet contributing enough to get the full match, do yourself a favor and fix that immediately.

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