Ask The Expert: Saving For Retirement
Money can't buy happiness, but it can help pay for a comfortable retirement. The beginning of the new year is an opportune time to get serious about saving for retirement, and the best way to do this is by setting specific goals, says the Minneso...
Money can't buy happiness, but it can help pay for a comfortable retirement. The beginning of the new year is an opportune time to get serious about saving for retirement, and the best way to do this is by setting specific goals, says the Minnesota Society of CPAs.
The first step in your planning process is to estimate how much money you'll need to save for retirement. This requires considering when you plan to retire, your income sources, and how much money you will need on a monthly and annual basis to live comfortably.
You should also consider these factors:
Pay off debt
This might seem counter-productive, but it's difficult to save for retirement when you're paying more in interest on credit card debt than you earn on your retirement investments. Unless you can come up with a plan that allows you to reduce your debt and save for retirement at the same time, it typically makes sense to pay off your credit card debt first. You need to be aggressive -- if you only pay the minimum payment due, it could take many years before your debt is fully paid off.
Spend less than you earn
This is a key strategy for generating funds to put aside for retirement. Set a goal for cutting your monthly expenses by 10 percent or 15 percent a month and earmark that money for retirement savings.
Contribute to your employer-sponsored retirement plan
If your employer offers a 401(k) plan, make contributing as much as possible a top priority. Contributions to a 401(k) are made with pre-tax money and grow tax-deferred, which means you'll reduce your tax liability while building your retirement fund. As an added bonus, many employers match a portion of your contribution, which makes your retirement fund grow even faster.
For 2007, the maximum you can contribute to a 401(k) is $15,500. If you're age 50 or older, you can contribute an extra $5,000 under the law's "catch-up" provision.
Pay yourself first
If your company doesn't offer a retirement plan, you should open a traditional or Roth IRA. Workers who are eligible to establish traditional or Roth IRAs may contribute up to $4,000 for 2007 ($5,000 for people age 50 and older).
Instead of waiting until next April 15 to write a check for your IRA contribution, arrange to have up to $333 per month deposited directly to your IRA ($416 per month if you're eligible for the "catch-up" provision). Automatic deductions are an easy way to make the maximum contribution, since you're less likely to miss money you don't see.
If you have self-employment income, look into a simplified employee pension (SEP) plan or a Keogh. These plans allow deductible contributions, and your money grows tax-deferred.
Put retirement savings above saving for college
Saving for your child's education is an important goal, but you shouldn't put it ahead of your retirement saving. There are many options to help with tuition payments, such as student loans and financial aid, while there are no scholarships or loans for retirement. And since most schools do not factor in retirement assets when determining financial aid, saving for retirement can actually work in your favor.
Invest wisely and monitor your retirement fund's performance
Learn all you can about investing so you can maximize the returns your retirement investments earn. Invest in a diversified portfolio and keep in mind that, over the long term, stocks generally outperform other investments, making them ideal for growth. Review your retirement portfolio regularly and make any necessary adjustments.
Money Management is a series provided by the Minnesota Society of Certified Public Accountants. For personal and small business information, visit www.mncpa.org or call (800) 331-4288.