Savings for Retirement

This important advice on savings for retirement was submitted anonymously. It is good information from a knowledgeable real person on the importance of setting aside money for retirement.

Planning your retirement is one of those situations where you can't really say "it's never too late."

The simple truth is the later you start accumulating savings for retirement, barring unforeseen circumstances, the less you're going to have financially when you reach your retirement point.

Of course, if you've reached your late 50's or so and have done virtually nothing as far as planning for your retirement, and all of a sudden that $2.00 lottery ticket for the Mega-Millions turns out to be a winner of the $100,000,000 lottery, then you don't have to worry about all that planning you should have done up to that point.

But you will still need to come up with a plan for that almost $4 million you're going to get every year for the next couple of decades. But for the rest of us who aren't that lucky, we'd better have been planning for the previous decades where we've been around!

If we're lucky enough to work for a company who sponsors a 401-k for its employees, or even better, if they match some part of your contributions, then at the absolute minimum, you need to contribute enough to get the full matching amount that the company will contribute because that is free money and you can't get any better than that! If, for example, your company will match dollar-for-dollar your first 2% of your salary that you put in and $.50 for every dollar from 3% to 10% that you put in, if you put in 10% of your salary, then you have already made a 60% profit on your contributions.

401k Savings for Retirement: A Matching Example

So, let's assume that you put in $100/pay period with 26 periods a year. At the end of 20 years you'll have $52,000 of your own money in your 401-k plus $26,000 of the company's money and that's not considering any growth of your investments or any increases in your wages over that 20 year period! If you consider a modest 4% return on your investments, then by the end of that 20 year period with your total contributions of $52,000 you will have accumulated over $128,000 in savings for retirement!

Of course, you will almost surely work for more than 20 years before retiring and you will probably get increases in salary over that extended work period so your contributions will probably go up, at least some amount over that period so your retirement nest egg should end up larger than that. Contributing a part of any raises, bonuses, profit-sharing, etc. should be an integral part of your retirement planning as you get older.

As your 401-k or other retirement plan grows, you should also look at moving part of it into a stable fund to protect a portion of your retirement savings against the possibility of future problems in the stock market/investment world.

Putting some of those funds into higher risk speculative funds might also be part of your plan but you should think of any speculative funds as "gone." Put another way, don't speculate with any funds that you consider as necessary!

Other possibilities are Individual Retirement Accounts, or IRAs. There are 2 types of IRA's, regular IRAs and Roth IRAs. With a regular IRA you can deduct your contributions to your IRA from your taxable income whereas with a Roth IRA you cannot. Put another way, Roth IRA's are funded with after-tax funds while regular IRAs are funded with before-tax funds.

If you're in a high tax bracket after you retire you'll probably be better off contributing to a Roth IRA but if you expect not have a great amount of income after you retire and to be in a lower tax bracket, then you will probably not profit very much by having a Roth IRA.

The most important thing to remember about saving for retirement is that you need to start saving as early as possible and not touch those retirement funds for any reason unless it is critical to your survival and then, only as a last resort! Saving, whether it is for short-term financial goals or long-term goals such as retirement needs to be started early, carried on consistently, and kept safe.

The best way to do your savings for retirement is to do it through payroll deduction, allotments (for those in the military), or automatic transfers from your checking account to your savings or investment accounts. Once you get money in your hands it's hard to not spend it in most cases, so using automatic features of your payroll account or banking account are the best way to make your savings goals reachable. Out-of-sight, out-of-mind is the rule to use!

One last thing to remember about your savings for retirement is to make sure that at least some percentage of your savings are in cash and to not have everything in IRAs, 401-ks and stocks. Sometimes you need to have ready access to cash for those things that come up and must be handled quickly.

It is much better, from a financial standpoint to be able to pull some quickly needed cash out of a savings account than it is to have to draw money out of a retirement account that will only allow you to pull out money prior to reaching the government-determined full retirement age by paying income tax on the withdrawn funds (in the event of a non-Roth plan) plus a healthy penalty fee. Tying up all of your funds in retirement accounts can cost you some of that well-earned retirement earnings and you don't want to do that!

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