Many of us writing on the subject of retirement investment begin with phrases like, “In these uncertain times” or “challenging economic times.” But let me tell you, investing for retirement has always been uncertain and always challenging. That’s the nature of the beast!
If investing were easy, then we would all be wealthy, wouldn’t we?
Although investing is a challenging exercise, it isn’t rocket science. Anyone who has formulated a vision of the lifestyle he or she wishes to lead in their retirement years has a leg up already.
Once you have established the two main goals…
1.) When will I retire?
2.) What income do I require to live my dream?
The rest is fairly straightforward.
Realistically, most of us have limited disposable income to devote to our retirement savings, especially if we are just embarking on our career, raising a family and generally trying to make ends meet. That said, some retirement savings is far superior to no retirement savings.
Almost everyone can find some money to invest. You must begin this process early, regardless of the amount you can set aside, set aside something!
I say this for 2 reasons. First, there is a time value to money. Thanks to the power of compound interest, even small amounts grow over time. Second, by starting early you develop a lifelong habit of saving. A very good habit to have, if I say so myself.
The majority of us have but a few retirement investment options. They are:
- the 401(k) – Roth and/or Traditional
- the IRA – Traditional or Roth
Your employer may offer a pension plan in addition to a 401(k), but this is not typical today.
In addition to this, there are a multitude of other savings options, but they are not designed specifically for retirement and most have tax consequences that can be avoided by sticking to a retirement investment vehicle. You have only so many eggs! Don’t make yourself crazy looking for more baskets than you need!
The 401(k) is the first place you should invest. In the traditional 401(k), contributions are pre-tax income, and you pay no taxes until the money is withdrawn.
Most employers offer “matching contributions” to their 401(k) plans.
It is important to note that 401(k) plans vary in their rules. It is important to thoroughly understand the rules governing your particular employer’s 401(k) so that you can maximize its benefits and avoid its pitfalls. YOU MUST DO THIS!
The first thing you need to know about your 401(k) is the percentage of your employer’s matching contribution and the dollar limit, if any. Keep in mind, irregardless of other factors, the IRS limits your contribution to an annual maximum of $17,500 if you are under 50 years of age and $23,000 if you are 50 years of age or older.
Your employer’s 401(k) plan will define the matching contribution. This is usually expressed in the following manner:
100% match up to the first 5%
Let me show you exactly how that translates. First 5% refers to your gross annual salary. So, if your gross salary is $50,000, and you contribute $3000.00 annually. Your employer will contribute $2500.00 because $2500.00 is 5% of your gross and the max that your employer will match. Thus in the first year, your principal balance will be $5500. $3000.00 is your money and $2500.00 is your employer’s money. It will remain your employer’s money until you are “vested” in the 401(k) plan.
See why you need to read the rules!
How much you decide to contribute to your 401(k) is going to be determined by your financial circumstances and your retirement goals.
Do not contribute so much to your plan that you are unable to deal with the occasional financial emergency. Why? Your 401(k) money is very difficult to access before retirement age and if you do have to withdraw any, it is taxed and you may have pay a 10% PENALTY ON THE AMOUNT WITHDRAWN!
On the flip side, if your income is such that you can tuck away more than the IRS limits allow for your 401(k), you can always put the surplus bounty into a Roth or Traditional IRA.
In the unhappy event that a 401(k) is unavailable to you, then open a Roth or Traditional IRA as your retirement investment option and make disciplined, regular contributions. When it comes to investing for retirement, there are countless approaches you can take.
What have you done to save for retirement? Share your knowledge and experiences below!