Saturday, March 23

Retirement Planning: It's Never Too Early or Too Late


Whether retirement is many years away or just a few years in the future, preparing for it is important. With many employers offering 401(k) or other defined contribution plans, instead of pensions, saving for retirement is your responsibility. No matter your age, it's never too early or too late to start. Make the following tips work for you.

In Your 20's or 30's?

It's never too early to start saving for retirement. For many younger people, saving for retirement is at the bottom of their savings goals. But starting your retirement savings during these years can produce big results for your retirement. Why? Time, not money is your greatest asset. Even small amounts of money invested for 30 to 40 years have a chance to grow into much larger amounts. Here are several steps that financial planning experts recommend.

Start saving. Get in the habit of paying yourself first. Set a savings goal for each pay period and have that direct deposited into your retirement account. Experts recommend aiming for 8 to 10% of your income. Then make a budget for all other expenses based on your net income.

  • Participate in your employer's 401(k) or 403(k) plan. Contributions are tax-free. Matching funds from employers can increase the power of your contributions, so make sure you contribute enough to qualify for the total matching amount. If you are under age 40, consider a more aggressive growth strategy for choosing investment options because you have years to recover from market downswings.
  • Setup an Individual Retirement Account (IRA). If your employer has no 401(k)/403(k) plan, setup an IRA for yourself at a financial institution. Deposit as much as you can. The annual limit for 2015 is $5500 and you have until April 15, 2016 to open one. The annual limit will be the same for 2016. Even if you are covered by an employer retirement plan, you can open an IRA but you may not receive the full deduction.

It's very important that you don't touch your retirement savings. Withdrawing money from your accounts reduces your principal and interest, you may lose tax benefits, and you may have to pay withdrawal penalties.

Limit debt. Make a budget that helps you live within your means. Pay down existing credit card debt. Save toward purchases you want instead of charging them and racking up high interest charges. Shop wisely for big purchases. Less money spent on debt payments means more money for necessary expenses and savings.

Maintain an emergency fund. If you need funds for emergencies such as repairing your vehicle or bridging time between jobs, you don't want to tap into your retirement fund. Save up a three to six months emergency fund. Keep that fund in a savings, money market, or other easily accessible account.

50 or Older?

It's never too late to start saving for retirement. Now is the time to assess how much you will need for the retirement you envision and how close you are to reaching that goal. You also want to review your projected social security income for different retirement dates. For example, what would be your projected social security income be if you retired at 62 compared to full retirement at 66 or 67?

Maximize your retirement savings. Once you turn 50, federal regulations allow you to contribute additional funds to tax-advantaged retirement savings plans. If the amount you've saved is less than you need, these rules help you catch up. Most financial planners recommend contributing the maximum allowed if possible. For example, the maximum for a 401(k) or 403(k) is up to $24,000. The limits of your individual plan may be lower. For an IRA, the over 50 maximum contribution is $6500. You can find more tips in the FoolProof Retirement Guide.

Increase your personal savings. Save money in addition to your contributions to tax-advantages accounts. Reducing expenses can help you maximize your savings.

Pay off credit card debt. Paying off debt while still working, means you won't have to use retirement income to pay it. After the debt is paid off, continue making those payments—into your savings account.

What's the bottom line?

Experts advise that whatever you can save toward retirement is helpful. Even if you can't meet your ideal goals today, get started and work up. Use the savings vehicles provided by your employer and your financial institution. You'll be glad you did.

For more information

FoolProof Retirement Guide

Savings Fitness: A Guide to Your Money and Your Financial Future
This publication can help you set goals and save for your retirement no matter what age you are.

Taking the Mystery Out of Retirement Planning
This publication is for workers who are 10 to 15 years from retirement.

What You Should Know About Your Retirement Plan
This publication can help you understand various retirement plans that an employer may offer.