Photo courtesy of Tax Credits
Using your tax return every year to save for retirement is the smartest move you can make. Many of us with children are fortunate enough to get the child tax credit, which is $1,000 per qualifying child. If you have 2 children, that is an extra $2,000 a year that you can invest into a retirement account.
Benefits of Saving for Retirement Early in Life
A person who invests $3,000 from age 21-26, and no more, will make $1.4 million dollars on their investment with a 10% rate of return. A person who invests the same amount from age 31-36, and no more, will make a little under $500,000 with a 10% rate of return. Imagine how much either person would make for retirement if they kept saving an extra $3,000 per year for retiremement. They would both be well into the millions. $3000 sounds like a lot of money, but it is only $250 per month, and very similar to a tax refund for a family with 2-3 children.
Use your Income Tax Return for Investing
There are two ways to use your income tax return to invest for retirement. The first is to throw the money into a retirement fund like a Roth IRA or a traditional IRA, put it in a freedom fund of your choice in one lump sum, and do the same year after year. The other option is to dollar cost average the money.
What is Dollar Cost Averaging?
Dollar cost averaging is an investment strategy that is meant to provide the largest rate of return over time. An investor puts in a fixed amount of money every month into their portfolio regardless of the economic climate. The theory is that when the market is down, investors can buy more shares automatically, and when the market goes up those shares prices will grow exponentially.
Petition to Save
Many Ameicans like to think of tax return season as vacation season, or spending season. While this might seem like a good idea, there are better ways of saving for fun.
Fun should never be financed, and fun should always be planned (I know, I sound like the fun police). Fun should never create stress, it should relieve it, and you need less stress later in life when you are old and gray and want the freedom to travel around and visit the grandchildren and the world. Convince yourself that the tax return is not your money, rather money pegged to save for that future lifestyle. Save whatever is left from your tax return and stick it into your retirement account. Even if it is only $100 or $10. It is best for you and your family to forgo a little now, in order to have a better and more prosperous future.
