How to save for retirement using IRAs?
Bill Gerhard: Hi! I'm Bill Gerhard, Director of Financial Services for AAA. In this video series, I'm discussing how to save for retirement using IRAs.
To understand how your investment can grow, you need to have a basic understanding of compounding interest and the Rule of 72. When you understand these factors, it's easy to see why it pays to start saving early, even if the amounts are relatively small at first. You'll also see why it's important to search for the highest safest yield on your investment.
Two acronyms that people confuse are APR and APY. APR stands for Annual Percentage Rate, APY stands for Annual Percentage Yield. APY refers to compounding, how interest accrues on your investment, so that percentage will always be higher than the APR.
Interest can be added to your account daily, monthly or annually. The more frequently it is added, the more you earn. That means your bank or credit union converts APR into APY, a rate into a yield or your return.
When you analyze investments, make sure you're comparing apples to apples, APY to APY. You can also get a quick estimate of your IRA's earning power by using the Rule of 72. This rule allows you to calculate how long it will take compounding interest to double your original investment.
Divide 72 by the interest percentage. For example, if you had an interest rate of 3%, divide 72 by 3; in 24 years, your investment would have doubled. Over time, compounding makes the money you save work harder for you, and that's what investing is all about.
AAA offers the information in this video series for educational purposes only. Carefully consider objectives, risks, expenses and tax implications before investing.
I hope these videos will help you plan for retirement using an IRA. Thanks for watching!