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Breaking Through the Retirement Rhetoric

Credit Wise (featured column)
by Jennifer Wallis

When retirement is literally a lifetime away, it can be hard to motivate yourself to start saving for it. When it seems so far away, many items such as houses, cars, and kids seem to take priority. It is best to stop putting it off and just start doing it. If you wait until you have "extra" money, you’ll never get started. Retirement will be here before you know it.

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If your only retirement plan is Social Security, I think it is time to get a new plan. It just won’t cut it because it just isn’t enough money. Here are some tips to begin your retirement savings:

Start as early as possible:

Due to the magic of compound interest, the earlier you start the more you will have. For example, if you put $2000 per year from age 22 to age 30 into an IRA but never save another dime; you will have $580,000 when you turn 65. If you wait until you are 30 to start saving, you’d have to save $2000 every year until you are 65 and you’d still only have $470,000.  (Based on 9% return).

Don’t get discouraged if you’re older than 22:

So, you missed the window mentioned in the above example, it’s OK. Just start doing it. No matter how small, start sinking some money into a retirement account. Start now and increase your amount when you can.

Talk to your HR Department: 

If you have not already been informed about your employer’s retirement plan, it is time to ask. They should be able to tell you what type of retirement benefits they offer. Most offer a 401k plan, which is simply a term for an employer sponsored retirement account. Many employers match the amount you put in up to a certain percentage of your income. For example, if you start by contributing 3% of your income, many employers will also contribute 3%. That is like giving yourself an instant 3% raise! Another cool thing is you’re your contribution is pre-tax. That means that you don’t get taxed on that amount of your income. So, chances are that you won’t notice much of a decrease in your take-home pay. If your employer does not offer retirement benefits, talk to a financial planner or retirement investor about starting your own IRA.

If the only IRA you know about is the Irish Republican Army: 

Don’t be intimidated if retirement fund terms are all foreign to you: I didn’t know anything when I first started either. Now that I have learned more about it, I am so thrilled to receive my quarterly statement to see how much my fund has grown. Oh and by the way, IRA stands for Individual Retirement Account.

Does vesting mean they’re going to dress me funny? You may hear the term “vesting” when you start exploring retirement funds. It means the part of your account that is yours to keep, should you leave the company. The part that you put in is always 100% vested which means that if you leave, you get to keep it. The employer’s portion of your account may be something that you have to earn over time. If you left after 4 years, you may only get to keep a certain percentage of the employer’s contribution. After several years, you will be fully vested and the contribution that your employer made will also be yours to keep.

How much should I contribute? Many employers have limits on what they will match and may limit how much you can contribute. If you are in a position to do so, at least put in as much as your employer will match. For example, if they match up to 6% of your income, strive to contribute 6% of your income. Beyond that, you may choose to diversify with your own IRA in addition to your employer's 401k. When you get a raise, increase your contribution.

Diversify your savings: 

While retirement accounts are very important, it is also necessary to have readily accessible savings. Borrowing from your 401k every time you run into trouble is probably not allowed and can get expensive. In addition to your retirement account, it is advisable to have 3-6 months of income in an easy to access savings account. Many banks now offer savings accounts with 4% or more annual percentage yield (APY). Even though it isn’t as high another savings options, it is still a great way to make your money work for you, while still being able to access it in an emergency.

If I have not yet inspired you to get serious about retirement, think about this. When you reach retirement age, you may still want to work for a while longer and that’s OK. However, be realistic and realize that you may not have as much spring in your step as you do now. You may have a lot more health issues and be unable to work. You don’t want to drag your aching bones out of bed every morning when you’re 70 because you need the money.

Work and save now, while you can, so you can enjoy the golden years.

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Copyright © 2007 by Jennifer Wallis. All rights reserved.

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