Saving For Retirement

Having a decent retirement savings may seem like the longest, farthest off goal you have, but saving for retirement needs to be just as important as clearing your debt, or possibly a close second. Most people have NO idea how much money they'll need to save for retirement, thinking that social security or their pension or the lottery will save them. It's a fact that time is the biggest advantage when it comes to building a retirement fund. Saving $5000 early and letting it build over time is better than saving $50,000 over 30 years. You'll end up with more money but starting earlier.

If you're not a young investor anymore don't worry. You can still get a great retirement fund going if you start now. The important thing, actually the critical thing, is to actually START. If you do nothing then you have nothing later on. Start saving something now and you'll really kiss yourself for it later.

If you're in Generation X I highly doubt you can count on social security income. As far as I'm concerned that's a big pyramid scheme that we're forced to pay into, but will likely never get returns from. I would suggest that you treat that as BONUS income if you really do get it when you retire. Use it for fun money like taking vacations or spoiling your grandkids, but don't count on it for groceries or utilities. It's far better to have your own savings strategies in place so you DON'T have to count on that and possibly end up disappointed.

If you're in the generation that will retire in the next 10 years or so, you probably will get some social security income, but you'll have to wait longer to get it than you normally would have (extended to age 67 for some). Again, it's best to have something of your own in savings working for you that you can count on more.

There are a lot of methods you can use to save for retirement. I'll overview some of them here.

401K - If you work for a company that offers a 401K you should take advantage of it. Some employers will match your contributions 50% or 100%, some will contribute no matter what. Either way, this is FREE money people so don't kiss it off. If you put in $1 and your company puts in $1, your rate of return is automatically 100% without any effort at all. This is not to be taken lightly. TAKE ACTION: If you aren't already contributing to your company's plan, start putting in the minimum amount. For me that's 5% of my gross pay. This money is also tax free up front. Meaning that you don't pay taxes on the money that you contribute until you take it out years and years from now.

Roth IRA - I really LOVE this little investment vehicle. The Roth IRA's best feature is that the money grows tax free and you don't pay taxes on it when you withdraw it for retirement (and some education expenses). So if you put in $1000 and it grew to $10,000 you could withdrawl that $10,000 and never pay taxes on it. Pretty neat, huh? The reason is because you already paid taxes on the $1000 you put in at the beginning. This means that any money you contribute to your Roth IRA cannot be listed as a tax deduction. That's a little painful to people to are desperate for every deduction they can get, but the point is to think long term. In the future it will hurt a lot more to pay taxes on $10,000 than it is to pay taxes on $1000 right now. And this isn't an extra tax on that $1000, it's the standard payroll taxes they already took out of your check, so you hardly miss it. The current maximum you can contribute is $3000 a year, which is actually a LOT of money for some people. Don't worry about reaching that max, just put in something. Even $50 a month will help you a lot more than you'd think later on.

Regular IRA - This was the standard vehicle for a long time. Contributions are tax deductible now but you will pay taxes on what you take out later.

You can work with an investment advisor to get started or attempt to wing it on your own. I've done both. I highly recommend Edward Jones (they hold several of my accounts) because their advisors will sit with you and explain all your options patiently and carefully. You'll probably be better off investing in a package of mutual funds instead of straight stocks, there's less risk involved. Of course you can start investing in stocks, but if you're just getting started it's probably best to avoid playing it fast and loose.

I recommend these sites for researching information on mutual funds and retirement investing.

• Edward Jones (they use primarily American Funds)
• smart money.com
• mutualfund education site
• msn mutual fund research page (awesome tool for picking mutual funds on your own, when you're ready)

Many people who have large outstanding debts will ignore their retirement accounts in order to clear the debt. Certainly if the interest on your debts are 18% you'll need to clear them. (See the page on credit card options for more information on how to reduce your interest rate). But time is the most important piece in building a retirement fund. The sooner you start the less money you need to invest in order to have a big account during retirement. If you take 6 years to pay off your credit card debts and put nothing in retirement during those 6 years, you'll have lost a LOT more in future earnings.

I would suggest that you put the minimum allowed into your retirement fund (sometimes as low as $50 a month!) while you pay off your debt. Sure it may delay paying off your debts by a few months but that $50 a month will have a chance to do so much more in the long term. By doing both you're getting yourself into a regular schedule for clearing debts and savings. Those habits will stick with you even after your debts are cleared so you can shift your debt payments into your retirement account and start building it even faster. The sooner you start saving the sooner you'll develop that habit. When your debts are finally paid off you should switch the amount you were putting toward debt into your monthly retirement contributions. Your accounts will build even faster and the pattern will be in place.