It's hard for most people to plan for the long term. If she has money, the average Josie spends it. Even if she saves, that money is likely to get used eventually for something fun: vacations, new cars, lottery tickets, cases of Reese's Peanut Butter Cups. This typical spending pattern means bad news for retirement, since none of that peanut butter cup money is going away for investment.
An automatic investment plan circumvents this tendency, short-cutting people's natural instinct to spend everything they earn. The AIP automatically takes money out of a person's paycheck and puts it into a retirement account.
Basically, the deposit into the retirement account comes out like taxes or social security. It becomes just another withdrawal, and never becomes part of a person's take-home pay. This allows the retirement account to build up without a person having to make the conscious decision to save on a regular basis.
Related or Semi-related Video
Finance: What is a Keogh Plan?64 Views
Finance allah shmoop What is a keogh plan Well basically
it's an ira for self employed people and more or
less like have your own company your own llc Well
then you probably want to sock away some dough without
paying taxes today betting that you'll want to pay him
instead Tomorrow if ever knock on the door of keogh
plan central and you'll save your way to prosperity Sort
of lungs You invest the money well in the market
Well basically the keio works just like an ira If
you makes a hundred grand a year and you pay
thirty five percent tax on that last ten grand that
you make or thirty five hundred box well instead you
could put that ten grand into a keogh plan invested
for however many years until you're an old geezer Think
seventeen and a half plus And hopefully that ten grand
grows a whole lot in an index fund or something
like that Because the market doubles about every seven eight
nine ten years something like that And then when you're
not working i'ii earning ah whole lot less money Well
then you can start withdrawing that money from your keogh
Plan You pay something more like i don't know twenty
percent in taxes at that point because you're taking lesson
pay than you did when you were accumulating wealth like
that thirty five percent So while the fuss to save
just fifteen percent net difference in taxes at thirty five
minutes Twenty there Well it's not that much fuss A
few forms you fill out of filing here and there
and well that's kind of it You go buy an
index fund and sit but more to the point it's
a day discipline That is when you have this wonderful
allure of saving taxes well for most people it's enough
of an incentive to actually save money rather than spend
it and that's a good thing to dio So you
don't end up like this guy living in his suv 00:01:46.432 --> [endTime] you know down by the river
Up Next
What is a 401(k)? A 401(k) is a retirement plan that is offered by many employers (government entities, however, use a 403(b) plan). These plans us...
What is a pension? Pensions are just retirement plans. Employers provide them and pay into funds as an investment for their employees. Once employe...