Final answer:
Alma is describing the principle of compounding interest in the context of retirement savings. Through consistent investments and the reinvestment of earned interest, individuals benefit from the growth of their retirement funds over time. Tax-advantaged accounts like 401(k)s and IRAs are notable investment vehicles for this purpose.
Step-by-step explanation:
Alma is describing the concept of compounding interest, which is a key concept in personal finance and investing, specifically within the realm of retirement savings. This is the process where the interest earned on an investment is reinvested, and future interest payments are then calculated on the increased balance, which includes both the initial principal and the accumulated interest. By investing a consistent 15% of her pretax pay, Alma is utilizing this powerful wealth-building tool to ensure that she has a robust retirement fund.
Retirement plans like 401(k)s and Individual Retirement Accounts (IRAs) utilize this principle and offer tax benefits, encouraging individuals to save for retirement. Contributions to these accounts are often pre-tax and grow tax-deferred, meaning the taxes on the investment growth are not paid until the money is withdrawn, typically in retirement when the individual may be in a lower tax bracket.
It's important to note that the rate of return and the quantity saved can significantly impact the amount accumulated over time, influencing an individual's retirement savings strategy. Financial advisors often recommend 'paying yourself first' by setting aside a portion of each paycheck for retirement savings, with guidance suggesting 15% as a good target to maintain a percentage of income during one's retirement years.