Retirement Planning
Are you ready for retirement, financially speaking? You may be thinking there’s plenty to spend money on now, like vacations, braces, mortgages, day care; why should I worry about retirement?
The answer? You can’t afford not to. Every month that goes by puts you either one step closer to financial freedom or one step behind. If retirement hasn’t been on your radar until now, don’t beat yourself up. It’s never too early or too late to save for your future. Here’s how.
Start now. No matter how little you can afford to set aside toward your retirement fund, do it now. If it’s only $20 a week to start, that’s okay. Do what you can now, find areas in your spending where you can cut back and increase your savings as you free up additional funds. Work your way up to dedicating at least 10 percent of your income toward your retirement savings. Use this handy calculator to figure out how long your savings will last.
Bank windfall money. When you earn a raise, get a refund or receive cash as a gift, put it toward your retirement. You already know you can get by without the extra funds, so put them to work for your future.
Go for the match. Take advantage of your employer’s 401(k) or other sponsored investment program, especially if they offer matching funds. At minimum, contribute enough to get the full company match - that’s free money!
Fund an IRA. In addition to maximizing your contributions to a matched savings program, make regular contributions to a traditional or Roth Individual Retirement Account (IRA).
An IRA, or Individual Retirement Account, allows you to contribute a portion of your earned income each year. In 2011, the maximum regular contribution per year was $5,000 for an individual and $10,000 for a married couple filing jointly. These limits apply to total annual IRA contributions; in other words, an individual can't contribute $5,000 to a Roth IRA and $5,000 to a traditional IRA in the same year.
While these accounts are similar, the fundamental differences involve the “T” word… taxation. Contributions to a traditional IRA are taken from pretax income and may be tax deductible in the year they're contributed. Funds in a traditional IRA grow tax-deferred; the money is taxed as ordinary income when you take it out at retirement (if you follow the rules). Contributions to a Roth IRA are taken from post-tax dollars - in other words, you've already paid taxes on the earnings - so unlike a traditional IRA, qualified withdrawals from a Roth IRA are tax free (if you follow the rules).
To determine which is the best fit for you, consult a financial planner.
Put your security first. Don’t sacrifice your future financial security to pay for your child’s education. If you have to choose, fund your
retirement first. There are numerous financial aid options available for your child, but only you can provide for a financially healthy
retirement.
When investing for your retirement, keep in mind:
Risk. Risk is the chance you might lose your money. The higher the risk, the higher the reward. How much risk are you comfortable with? Typically, the farther you are from retirement, the more time you have to recoup short-term stock market losses, so you can afford to a be a little risky. The closer you are to retirement, the more important it is to have a guaranteed return on your investment. As you age, adjust your investments to reflect the appropriate risk for your situation.
Diversification. Talk to your financial planner about the proper investment mix for your situation. Like the old proverb says, you don’t want all your eggs in one basket. An expert can help you find the right savings mix. Learn more about finding a financial planner. (PDF)
Fees. Know the fees attached to your retirement account. Also, keep in mind, if you withdraw retirement funds early, you could face some stiff penalty fees.
Did You Know?
The way we fund retirement has drastically changed in the past few decades. Employees used to work at the same place for years, earn a pension and retire. Today, retirement planning is primarily the responsibility of the worker. And, the average worker today changes jobs about 10 times before the age of 40.
