Retirement Planning: How to Save for the Future
By Michele Blandino
For most people, the need to save for retirement, particularly when they are in the midst of their working years, is a difficult concept to understand. Yet, the uncertain future of the Social Security system, coupled with the increasing incidence of under-funded or bankrupt corporate pension plans, makes the need to start saving early even more critical.
How Much
Most experts agree that people can expect to spend an average of twenty years in retirement. And, while some argue that most peoples’ living expenses decrease once they’ve finished working, this is not always the case. Granted, by the time most people retire, their youngest child has finished college; unfortunately, however, this does not mean that they will be finished paying for it. In fact, some families take second mortgages, home equity loans or other types of lending to help finance college educations with payments extending for years after the degree has been awarded. For those fortunate enough to enter retirement free from this type of debt, there will still be the expense associated with daily living – which may actually increase since more time is being spent at home – vacations, and hobbies. As a general rule of thumb, you should estimate that you will need between 70% and 100% of your current salary to comfortably live during retirement.
How to Save
To accomplish this, many people turn to vehicles such as the 401(k) plan which allows workers to set aside a pre-tax portion of their salary in an account which can then be invested in a wide variety of instruments. In 2005, workers under the age of 50 can contribute up to $14,000; that figure increases to $18,000 for workers over the age of 50. The money you earn also remains tax-deferred until it is withdrawn. As an added bonus, some employers match a portion of their employees’ contributions which will allow your savings to grow even faster.
If your employer does not offer a 401(k) plan, you may want to consider opening an Individual Retirement Account (IRA). With an IRA, workers under the age of 50 can set aside $4,000 each year (provided they earn at least that much) while workers over the age of 50 can put $4500 away. The money you put in an IRA can be deducted from your taxes and will remain tax-deferred until it is withdrawn. Further, depending on where you open the account, you may be able to invest the money in a wide variety of instruments.
Ask an Expert
Many people find it helpful to work with a financial planner to help establish and meet their savings goals. A financial planner can help you pick the right type of savings vehicle as well as provide guidance with respect to the types of investments you should make. Be sure to interview potential financial planners before making any commitments; it is important that you ensure he or she has your best interests in mind.
