Saving for retirement is a key pillar of financial wellness. According to the Internal Revenue Service, offering a retirement plan for employees has many benefits, including tax-deductibility of employer contributions, tax-free growth of assets in the plan, flexible plan options, and reduced costs through tax credits and other benefits for starting a plan. Perhaps most importantly, offering a retirement plan will help your practice attract and retain employees, which minimizes new employee training costs.
For employees, retirement plan contributions can reduce current taxable income. Contributions and investment gains are not taxed until they are distributed, and you can contribute easily through payroll deductions. Because interest accrues over time, small, regular contributions can grow into significant retirement savings, and employees can carry retirement assets from one employer to another. For some employees, a saver’s credit might be available. Saving for retirement from an early age markedly improves financial security in retirement.
The Benefits of Saving Early
The benefits of saving early in your career cannot be overemphasized. Saving just $50 per month in an account with a 6% interest rate for 40 years will accumulate $99,576.42. Your contributions add up to $24,000 ($50 per month x 12 months x 40 years), and the other $75,576.42 is interest earned. If you increase your contributions as your earnings rise, the total can be much higher. Starting to save for retirement as early as possible allows you to benefit from compound growth, requires smaller monthly contributions, and provides more time to recover from market volatility. Compound growth allows you to earn returns not only on your initial savings but also on the accumulated returns from previous periods. This dramatically increases the value of your savings over time.
Imagine two hypothetical savers assuming a 7% annual return. Saver A starts at age 25 and invests $6,000 annually for 10 years, then stops. With just $60,000 contributed over their lifetime, their investments could grow to more than $1 million by age 67 due to decades of compounding. Saver B waits until age 35 and invests $6,000 annually for 30 years. Despite contributing $180,000 of their own money—three times as much as Saver A—their balance at age 67 is only around $550,000.
With uncertainty about the solvency of Social Security in the future, it is more important than ever for employees to start saving early. A funding shortfall due to an aging population, a declining worker-to-retiree ratio, and the depletion of the Social Security trust fund are cause for concern. The ratio of workers contributing to the system per beneficiary has decreased significantly, from around 4 to 1 in 1965 to just under 3 to 1 in 2022. In addition, the Social Security trust fund, built from past surpluses, is covering the annual shortfall and is projected to run out of funds by 2035. The growing gap between the rich and the less well-off is contributing to this depletion, as a larger portion of income for high earners now exceeds the annual wage cap for Social Security taxes.
In Summary
Retirement plans help provide peace of mind, stability, and long-term well-being, helping both employee and employer thrive. While employees can choose from several tax-advantaged retirement plans, the most important thing is to start saving early with regular contributions. Don’t miss out on compounding!
Related Reading
- How to Achieve Your Compensation Goals in Equine Practice
- The Business of Practice: Retirement Plans for Small Equine Practices
- Veterinary Wellness Briefs: Smart Financial Moves for Equine Practitioners
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