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Have you ever daydreamed about winning the lottery? What would you do if you won? Quit your job? Travel the world? Buy your dream car or vacation home? While it's fun to think about what you'd do with lottery winnings, it may not be a good way to establish a viable plan for funding your retirement years.
Unfortunately, not all Americans agree.
In fact, 25 percent of respondents to a Consumer Federation of America survey believe their best bet for building retirement wealth is playing the lottery.
In reality, you stand a better chance of being in a plane crash - about one in 250,000, according to the National Safety Council - than you do of winning a lottery jackpot.
How Small Sums Grow
What some lottery players don't realize is that saving even a small amount each week in an interest-earning savings or investment vehicle may provide far better odds for having a retirement nest egg.
Thanks to the potential of compounding, even small sums can add up if given enough time. Keep in mind that an investment, unless a fixed product, does not guarantee a profit and will fluctuate in value.
With compounding, you can earn interest on your beginning principal and on the interest you earn each following year. Hypothetically, if you earned 5 percent interest on $1,000 in your retirement account, you'd have $1,050 at the end of the year.
The next year, you may again earn 5 percent - but this time on $1,050 instead of $1,000, so you'd end up with $1,102.50. The following year you could potentially earn interest on $1,102.50, and so on. (These hypothetical rates of return are for illustrative purposes only and are not meant to represent the past or future returns of any specific investments or investment strategy, or to imply any guaranteed rate of return.)
Less Is More
The beauty of retirement planning means you can work towards and invest to reach your investment goals; you should begin investing early enough and have the self-discipline to leave your investment untouched.
Choose the Option That's Best for You
The types of investments you choose to fund your retirement portfolio can affect your ability to benefit from compounding.
You may choose to put your money in various financial vehicles with varying strategies, such as an investment portfolio, certificate of deposit or even a savings account. Your choice depends on a number of different factors, including your risk tolerance, your current financial situation and your time span until retirement. Some options you may want to consider:
Certificates of deposit (CDs), money market accounts and U.S. Savings Bonds, provide steady growth with little or no investment risk. Generally,
CDs feature known, fixed interest rates available from a government-insured savings vehicle. Both the principal investment amount and the interest earned are FDIC-insured on the rate of return and the fixed principle value, up to $100,000 per account.
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