Retirement should be a time when you can relax and enjoy yourself after years
of work. But in today's uncertain world, and with escalating health and energy
expenses, you might spend your retirement worrying about money.
You wouldn't be alone. According to an updated Congressional Research Service
report, an astonishing 42 percent of all workers ages 25 through 64 do not even
have a retirement savings account. While that may be a discouraging statistic,
it really doesn't have any bearing on your retirement plan. A financially
comfortable future is largely in your own hands. Here are some basic plans to
help you plan, save and live your retirement.
1. Set Goals and Figure Out How to Achieve Them
A study released by the American Savings Education Council found that 58
percent of American workers in 2007 didn't know how much they need to save for
retirement. In fact, the study concluded that the lack of a financial plan would
probably make two out of three households unable to achieve one or more major
life goals. To avoid being part of the statistic, think about the following:
- When would I like to retire?
- How many years do I expect to live in retirement?
- What lifestyle do I want when I retire?
- What monthly income will I need during retirement to maintain that
- What will provide that income (pensions, Social Security, investment
- How many years do I have left to save?
Use the numbers you've come up with to calculate what you'll need in
retirement and how much you have to save between now and then. An online
calculator is the way to go - it allows you to play with the variables and does
the really hard math (like adjusting the numbers for inflation and computing
compound interest) for you in a flash.
Thinking about what you'll need should put you in a retirement frame of mind
and encourage you to keep working on your plan.
2. Use Accounts That Help Your Money Grow
Saving for retirement is so important that even the government is willing to
help out by letting you pay the taxes on the earnings in your retirement
accounts - such as IRAs, 401(k), 403(b) and 457 plans - later.
Some retirement plans even provide a break on the front end by letting savers
invest pre-tax dollars or deduct their contributions.
While all retirement accounts offer tax benefits, no two are exactly alike.
That's why you need to take the time to learn about your options. You'll want to
pick the one that provides someone in your particular situation the best
opportunity to save the most.
401(k), 403(b) and 457 Plans: As a general rule, anyone with
access to an employer-sponsored retirement plan should participate. The fact
that contributions are deducted from your paycheck pre-tax means that whatever
amount you contribute will show up as a smaller reduction in your net pay. For
example, if you're in the 25 percent tax bracket, a $100 contribution might
reduce your paycheck by only $75.
Plus, many employers make contributions to your account based on a percentage
of your salary or they provide matching funds based on how much you contribute
to the plan. That's like getting a bonus every pay period!
If you're not already participating in your company's retirement plan, ask
your HR/Benefits representative:
- If the company offers an employee retirement plan
- If the company matches employee contributions (if so, at what rate and how
much do you have to contribute each month to get the maximum match every
- What investment options are available
- When you can sign up
IRAs: If your employer does not offer a 401(k) or similar
retirement plan, you may be eligible to fund a deductible traditional Individual
Retirement Account (IRA). Whether or not your employer offers a retirement plan,
depending on your income, you may be eligible to fund a tax-deferred traditional
IRA or a tax-free Roth IRA.
3. Choose Investments That Grow But Don't Keep You Up at Night
You're not going to get much further if you put your money into a savings
account, money market fund or other "safe" place than you would if you stashed
your cash under the mattress. In fact, these supposedly safe options are
actually quite risky. The return they offer is so low; your money won't be able
to keep pace with inflation. In other words, after taxes are paid on your
earnings, you'll be able to buy less with your money when you retire than you
Just think about where you'd be today if you had your retirement money
invested in 30-day Treasury bills (which are taxable at the federal level).
There's no one investment model that works for everyone -- some savers are
more risk tolerant than others (they don't lose sleep over temporary dips in the
stock market), some have a longer time horizon, and all have different goals.
But, without exception, everyone needs to invest with the objective of at least
achieving after-tax returns that beat inflation. Beyond that, each individual
will have to do some self-assessment to determine what asset allocation works
best for their particular situation.
4. Make It Easier by Sticking to a Plan
Saving for retirement is a lifelong activity. Like the story of the tortoise
and the hare, slow and steady usually wins the race. Consistent contributions to
tax-advantaged savings accounts should be a part of everyone's plan. Regular
savings outside of designated retirement plans might also be wise (they don't
carry many of the same age-related withdrawal limitations, making it possible to
use the money for an early retirement).
Wherever you stash your savings, dollar-cost averaging should be part of your
strategy. In a nutshell, dollar-cost averaging means investing a fixed amount on
a regular basis in a particular investment. One of the benefits of investing
consistently is that you avoid the temptation to try to time the market. Not
even experienced traders are consistently able to time the market successfully.
And making even a few mistakes in your timing can be disastrous to your
long-term investment returns.
Another benefit of dollar-cost averaging is that you even out some of the
fluctuation in share price. For example, if you invest $100 on the first of
every month, and this month shares are at $10, you buy 10 shares. Next month,
when shares are at $5, you get twenty. That means you've got 30 shares at an
average price of $6.66 -- neither the highest nor the lowest price of the
two-month period, but lower than the actual average price of $7.50. Over time,
dollar-cost averaging can improve your investment returns.