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 Pension?31 Views
finance a la shmoop. what is a pension? well it rhymes with tension, and likely
for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]
another state employees pension that's backed up by a state that's going
bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people
well a pension is another term for a retirement fund. but what's special about
a pension is that the employer essentially forces you to put away money
for your retirement and then they invested for you.
how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]
employed ditch-digger might get a contribution of say 10 grand a year into
her pension, and that's each year 10 grand of forced savings for as long as
she you know digs ditches for the state. and in some states where the unions are
strong in the governing financial knowledge is weak the government
guarantees a minimum financial return on the pension investment made on behalf of
the employees. that is in California for example the state guarantees a 10% per
year return on their invested pension savings. if the invested return like [equation]
investing it in Wall Street and stocks and bonds and private equity funds and
all that stuff well if that invested return is less than that number less
than that 10%, then the state rights to the pinch and a check to cover the
incremental difference. yeah it's a huge Delta and it's well pretty much why you
a Californian Illinois you're going bankrupt remember. Jesus Saves
but Moses invests. [ Moses, holding stone tablets glares and demands interest]
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