The High Cost of Interrupting Plan Contributions

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Remember Aesop's fable about the tortoise and the hare? Slow and steady wins the race. Well, it's the same with your retirement plan. By making regular contributions to your retirement plan, you can put the advantages of compounding (interest added on interest) to work for you. But if, like the hare who took a nap in the middle of the race, you interrupt your retirement plan contributions, you may end up shortchanging your future.

Many families face the dilemma of investing for the future while still meeting today's financial obligations. If you don't invest for your retirement now, there may not be time to do it later.

The cost of taking a break. To understand the impact of a lapse in your retirement plan contributions, consider the case of two hypothetical investors:Constance contributes $150 a month for 20 years straight. Her account earns 8% annually. Skip contributes $150 a month for five years, then makes no contributions at all for five years. After that, he resumes contributions of $150 a month for 10 years. His account also earns 8% annually. 

Compare account balances:*
  Constance Skip
after 5 years $11,242 $11,242
10 years $27,766 $16,518
15 years $52,382 $35,292
20 years $89,052 $63,103

Constance contributed a total of $9,000 more than Skip, but her account balance after 20 years is $25,949 larger. Even more amazing, if Skip increased his monthly contributions to $225 after the five-year lapse -- thus completely erasing the $9,000 difference in contributions over 20 years --his final balance would still fall $12,228 short of Constance's.

Making It Easier to Save

It's difficult to put a goal that may be many years distant ahead of more immediate concerns. But, your retirement plan helps to make it easier:

  1. Money can be deducted directly from your paycheck and invested in your account. You pay yourself first.
  2. 2.By investing a set amount at regular intervals, such as every payday, you will buy more shares when prices are low and fewer when they're high. The strategy, known as dollar-cost averaging, may result in an average share purchase price that's lower than the average market price over the same time frame.**

Finding Money to Invest

Small changes in your spending habits may be all that's needed to fund your plan. Or, look for other places to trim your household budget:

  • refinance your mortgage at a lower interest rate.
  • consolidate high interest rate debt with a lower rate home equity loan.
  • save on utility bills by using energy-efficient appliances and practicing conservation techniques.
  • trim transportation expenses by carpooling, using public transportation or keeping cars a year or two longer before trading them in.

Make Your Future Top Priority

Making steady contributions to your retirement plan can help you build toward a solid financial future. If you'd like to increase the amount you're setting aside each payday, see your plan administrator or Certified Financial Planner.

*Source: Web site financial calculator, "How much will an investment made now be worth in the future?"
** A periodic investment strategy cannot guarantee a profit and does not protect against loss in declining markets. You should consider your ability to continue investing during periods of low price levels.

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