Far too many people put off savings for their retirement until they are in their 30’s or 40’s. The best time to start saving is with your very first paycheck! For many, putting off saving for retirement has little to do with having enough money to put away.
Far too many people put off savings for their retirement until they are in their 30’s or 40’s. The best time to start saving is with your very first paycheck! For many, putting off saving for retirement has little to do with having enough money to put away, and more to do with understanding all of the plans - and benefits - their employer offers.
What’s the first step to starting your own retirement plan? Start here:
Step One: Know Your Options
Maneuvering through the maze of retirement plan options may seem daunting at first, but remember, there are really only three different kinds of savings plans available:
· Employer-Sponsored plans, like the 401K or Simple IRA both allow employees to save a certain percentage of their salary before taxes. Oftentimes, employers even match the contribution up to a certain percentage, giving the employee even more 'free' money for retirement.
· Personal Savings plans, are plans that you set up yourself, in addition to employer-sponsored plans, to allow you to save even more for retirement. A conventional IRA allows you to contribute up to $3,000 every year and deduct it on your taxes. Roth IRA’s are not tax deductible, but the money withdrawn at retirement is.
· Self-Employment plans, are plans designed for people who work for themselves. They allow you to take up to 25% of your salary (max: $40,000), and put it in a tax-deferred savings plan.
Step Two: Determine Your Eligibility
Once you know what type of retirement savings plans your employer offers, it’s time to find out what their regulations and restrictions are. Some employers require you to work for the company for a set period of time before they will allow you to enter into a program. Others may have income or contribution limits. Still others require you to be vested before you can keep their contributions. Check with the Human Resources Department for details.
Step Three: Ask About Matching Contributions
Who doesn’t love getting free money? While some more generous companies match an employee’s contribution dollar for dollar, others may only match half that amount or less. The law requires companies who offer standard 401K plans to match contributions by 3%.
Step Four: Choose Your Portfolio
Understanding how these retirement plans work can be confusing enough, but once you sign up for one, you’ll have to choose where your money goes. Most plans allow you to choose your portfolio (what your money will be invested in). Most experts agree a good mix of stocks, bonds and cash is the safest for long-term investing.
Step Five: Understand the Tax Advantage of Saving for Retirement
The most common reason people fail to save for retirement is that they simply don’t have the money. But consider this: the money you put away through an employer-run plan is tax-free. That means your contribution is taken out of your paycheck before taxes. So, if you contribute $25 a week into your retirement plan, your taxable income is reduced by more than $1,200 a year! That means you’re really only paying about $19 or $20 - not the whole $25! Plus, in most cases, your employer is also kicking in a matching contribution, which means for every $50 you may be saving for your future, you’re really paying less than $20-and on top of that it earns interest too!
Step Six: Avoid early Withdrawals
It may be hard to leave that money sit untouched when hard times strike, but unless absolutely necessary don’t dip into your retirement savings before the age of 59 1/2. Not only will it dramatically reduce what you have for your future, but you’ll pay hefty penalties for early withdrawal.
Resource: http://www.isnare.com/?aid=156457&ca=Finances
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