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How much to save for retirement?

February 6, 2012

Fewer than half of Americans have calculated how much they need to save for retirement – but the average American spends 20 years in retirement!

Have you planned how much you need? Check out MSN’s Retirement calculator:

So, how do you save up that money when you’ve got other bills to pay, saving an emergency fund, or just plain don’t have any extra cash? Here’s my tips to think about (even though I am not a financial advisor and these ideas are only based on my own personal experiences.)

1) Look at your employer’s 401K plan. First, if your employers matches, put in as much as you can up to the max that your employer matches to. If your employer matches 5% of your contributions, put in 5%. That is free money from your employer! If your employer doesn’t match contributions, speak with a member of HR to determine the benefits of using your employer’s 401K plan. It may have more or fewer benefits than creating your own account.

2) If you are freelance or do not participate in your employer’s 401K plan, consider setting up a Traditional IRA account. The Traditional IRA is a retirement account that is funded with pre-tax income. You receive a tax break and delay paying taxes on that income until the funds are withdrawn in retirement. Beware, though, the inability to withdraw your funds, as written on

 With a Traditional IRA you are not allowed to withdraw funds before age 59 and 1/2 without paying penalties and taxes. Early withdrawals pay a 10% penalty to the IRS as well as your standard income tax rate. You can end up paying over 40% of your withdrawal in taxes and penalties. Additionally IRS rules force you to begin taking minimum distributions (withdrawals) from a Traditional IRA at age 70 and 1/2.”

Since these are pre-tax income contributions taken from your check, you must figure out what amount you can contribute. Even 1% of each check is more savings than you had previously, and may be an amount you don’t even miss. If you can do 5% or 10%, it may even reduce the amount of taxes you pay overall and put you in a lower tax bracket with your year-end income. Can you live without $20? Without $50? Calculate how much 1%, 5% or 10% of your paycheck would be, and multiply it by 12. That’ll be your yearly savings for retirement, which will only get compounded with your investments.

3) Consider opening a Roth IRA. This account is funded with post-tax dollars, with a maximum amount that can be invested each year (for most households, the max is $5000.00). You pay taxes on your income this year as you would during any year and invest the funds in the Roth. Since taxes have been paid before investing you never pay income taxes on those funds in the future. On, the difference is shown:

Paying taxes today allows those earnings to grow tax-free until you tap the Roth IRA for retirement. This tax-free investment growth is one of the primary benefits of using this type of account…you [are] allowed to withdraw your contributions at any time. Since tax has been paid on the contributions there is no tax charged and no early withdrawal fee from the Internal Revenue Service. Also in contrast to Traditional IRAs and 401k plans you are never required to withdraw funds from a Roth IRA.

4) Unsure if you’re ready to put money meant for retirement into the stockmarket? Set up a long term certificate of deposit (cd) account, a money market account, or any high paying interest account (preferably not linked to your checking or any of your other accounts). A traditional savings account pays one of the lowest amounts of interest, and any savings that you accumulate will be too easily accessible for those who spend their savings.

You may have to make a present-day lifestyle adjustment to accommodate what you envision your retirement lifestyle may be. If you want to have money later in life, you have to start today. Even a few dollars a week will make a difference in tomorrow!

From → money management

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