Saturday, January 4, 2014

Taking the Mystery Out of Retirement Saving

Happy New Year!  This is the time of year that many people focus or refocus on getting their finances in better shape, and it's a great opportunity to take a quick inventory of your spending, saving, and investments to see where there can be improvement.

Disclaimer: I am not a financial advisor and all advice is just personal advice from me based on what I've learned and my research.

Retirement planning does not sound like the most exciting of topics, but it honestly is to me.  It can be so incredibly rewarding to put money away and just watch it grow.

The biggest advice that I (or anyone else) can give is start early, and contribute what you can, even if it doesn't seem like much.  Compounding returns can be a powerful thing over time.  I was fortunate enough when I got my first full time job to have a (now ex)boyfriend in the accounting/finance field who instilled in me the fear of becoming a Walmart greeter if we didn't contribute enough to our retirement accounts, so I was stowing away 7% of my small nonprofit salary, which I'm now incredibly grateful for. The money is taken out of each paycheck automatically so you get used to what your take home pay is after this adjustment. There are a number of free online 401k calculators, like this one from Bloomberg that can show you how your contributions over time build up.  There are also many articles like this one that explain the benefits of starting early.  However, there is no time like the present to get going!

401k Plans
The beginning of the year (whether or not this coincides with a pay increase, but especially if it does) is a great time to look at your retirement contribution amounts.  If your company offers a 401k (or a 403b), I highly encourage you to take advantage of it.  These plans allow you to contribute pre-tax income, lowering your taxable income.  You can contribute up to the maximum annual amount ($17,500 for 2014).  An additional "catch up amount" is allowed for those 50 and over.

If you are fortunate enough to work somewhere that offers a 401k match (some employers will match up to a certain percentage of your income if you contribute that much or a part of that, for example Company A will match 100% of your contributions up to 5% of your salary and Company B will match 50% of your contributions up to 3% of your salary), take advantage of it if it's at all financially possible for you to contribute that amount.  If you don't, you're leaving money on the table.

Roth IRA Plans
Roth IRAs allow you to contribute post tax money up to $5,500, but then you do not pay taxes in retirement on the growth.  There are income limits to contributions (you can contribute up to the maximum if your adjusted gross income is $114,000 or less and you're single or $181,000 or less for a married couple), but check the guidelines if you're slightly over those numbers to see what you can contribute.  You can contribute as soon as the new year starts, but you can also do your contribution any time before you file your taxes (ie you can do your 2013 contribution now before you file your 2014 taxes).  I've always been encouraged to do the contribution earlier in the year just for longer amount of earnings, but depending on cash flow, do what makes sense for you.  I started my Roth IRA a few years ago and I wish I would've started it much earlier.  Even if your earnings are under $5,500 for the year, you can contribute up to the amount you learned.  A friend in college encouraged me to set one up, but I didn't follow through with it.  This would have been a great way to start retirement savings in high school or college when working a part time job.  Parents, encourage your children to get started early if they can.

The basics in order:
1. If your employer offers a 401k or 403b match contribute enough to get the maximum match.  Check with the HR department if you aren't sure what your employer offers.
2. After that if you can still contribute more(or if you don't have an employer match), contribute to a Roth IRA as much as you can up to the maximum allowed.
3. Still able to save more?  Contribute to your 401k or 403b up to the maximum.

Happy saving!

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