IT'S NEVER TOO SOON TO START SAVING FOR RETIREMENT.

You might love your job, but do you want to be working six days a week when you’re 71 years old because you can’t afford to retire? Some people will have less than half of what their pre-retirement income was when they retire. Surprisingly, only 58 percent of people in the U.S. are currently saving anything for retirement, according to the 2004 Retirement Confidence Survey by the Employee Benefit Research Institute and American Savings Education Council. What are you doing? Are you doing enough?

Start Now

Many people put off saving for retirement, but because of compound interest, starting early is much more productive. For instance, a 25-year-old who contributes $250 a month to an IRA for 10 years and then stops saving altogether will see their $30,000 total investment turn into more than $401,000 by age 67, assuming a return of 7 percent a year from a diversified portfolio. A person who waits until age 35 and saves $250 a month every year until retirement at 67 will have put away $96,000. However, since they started investing money 10 years later than the 25 year old, they will have $44,000 less at retirement. It’s your money; make the most of it.

According to the 2004 Retirement Confidence Survey by the Employee Benefit Research Institute and American Savings Education Council, 66 percent of American workers admitted they could save an additional $20 a week if they tried. Even at a return of 5 percent a year, $20 a week could grow into $50,000 after 25 years.

Explore the IRA Way

One popular way to save for retirement is by establishing an Individual Retirement Account (IRA). “Anyone can establish a traditional IRA as long as they have income,” explained Mike Lowe, a representative of Primerica, a division of Citigroup. “Actually, someone who doesn’t work but whose spouse has income could open an IRA in their own name. Up to $3,000 per year can be invested in an IRA – $3,500 is allowable after age 50. People can also roll over their investment from a previous employer’s 401K program into an IRA.” The benefits of an IRA are that contributions could be tax deductible, the interest grows tax-deferred until withdrawn, the funds can be used to purchase a first home ($10,000 lifetime maximum), and funds can be used to pay for education expenses for the IRA owner, their spouse, children or grandchildren at any eligible post-secondary educational institution. The funds can also be accessed, penalty-free, for death and some disability expenses.

Mike said a financial consultant from a bank, credit union, or independent company can help people choose what type of investment is right for them. The most common investment choices for an IRA are stocks, bonds, mutual funds or annuities. A financial professional can suggest investments based on such factors as your goals, age, and risk tolerance. For instance, someone in their 20s who doesn’t plan to retire until they are in their 60s might want to invest aggressively, because they will make more money in the long run. However, the length of time they invest is long, so they can afford to experience great gains and losses. An older person who is only a few years from retiring might want to invest more conservatively, because their investment might not have time to recover from a loss.

Reasons for Roth

A Roth IRA follows the same guidelines as a traditional IRA except you can’t claim your contributions to it on your taxes. “Your investment grows tax free,” Mike explained. “However, when you remove the money after age 591/2, you don’t have to pay taxes on it as if it was income. With a traditional IRA, you pay taxes on the earnings when you remove it.”

General Savings

People who would like to invest money for such ventures as sending their children to college or a building project could benefit from investing in mutual funds. There are other investment options for saving money – check with your financial consultant. 

Mutual funds are an investment program by which you pool your money with that of other investors to form a “fund” which then invests in stocks from many corporations or a group of bonds. A professional investment company manages mutual funds. The money from mutual funds can be withdrawn at any time – you don’t have to wait until you’re 591/2 years old. “You pay taxes on your mutual fund earnings every year and pay taxes on the money when you remove it, plus there could be some service charges based on the company, but it accumulates more money than making a deposit in a savings account that earns little interest,” Mike said. There are hundreds of funds available to fit every level of risk tolerance.

When investing, Mike strongly suggests using “Dollar Cost Averaging.” This is a method of investing in which a specific amount of money is invested at regular intervals in the same investment. Because you invest the same amount each time, you automatically buy less of the investment when its price is higher and more when its price is lower. Though the method

doesn’t guarantee a profit or guard against loss in declining markets, the average cost of each share is usually lower than if you buy only in “boom” times. For dollar cost averaging to work you must continue to invest regularly over time and purchase shares in both market ups and market downs. To keep it simple, you can make arrangements between the administrator of your mutual fund and your financial institution for money to be automatically withdrawn from your bank account on the same date every month.

Be Prepared

Planning for your retirement is easy. “Seek the advice of a professional,” Mike said. “Don’t just rely on the advice of a friend or relative.” Financial institutions, insurance companies, and financial consulting firms have representatives who can explain things in easy-to-understand terms and can help you choose what’s best for your situation. Don’t be shy about asking lots of questions. Primerica representatives are located in every state – check your phone book for one in your area. Pay now – don’t “pay” later with the stress of not having enough money to live on!

Types of Investments:

401k Plan: A defined contribution plan offered by a corporation to its employees, which allows employees to set aside tax-deferred income for retirement purposes, and in some cases employers will match contributions dollar-for-dollar. Taking a distribution of the funds before a certain specified age will trigger a penalty tax.

Annuities: A contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. The holder is taxed only when they start taking distributions or if they withdraw funds from the account. All earnings from investments in these accounts grow tax-deferred until withdrawal and cannot be withdrawn without penalty until a certain specified age. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns. Both are relatively safe, low-yielding investments.

Bonds: A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest on a specified date.

Mutual Funds: An open-ended fund operated by an investment company that raises money from shareholders and invests in a group of assets. Mutual funds raise money by selling shares of the fund to the public. The money they receive from the sale of their shares (along with any money made from previous investments) is used to purchase various investment vehicles, such as stocks, bonds and money market instruments. Benefits of mutual funds include diversification and professional money management.

Roth IRA: This type of IRA allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow, tax-free. Taxes are paid on contributions, but withdrawals — subject to certain rules — are not taxed at all.

Stocks: An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation’s assets and profits.

Traditional Individual Retirement Account (IRA): A tax-deferred retirement account for an individual that permits them to set aside money, with earnings tax-deferred until withdrawals begin at age 591/2 or later (or earlier, with a 10% penalty). There are a few exceptions to the early withdrawal penalty. Only those who do not participate in a pension plan at work or who meet certain income guidelines can make deductible contributions to an IRA. All others can make contributions to an IRA on a non-deductible basis. Such contributions qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn.  * Source: www.investorwords.com 

It’s never too soon to start saving for retirement.