Red Portfolio Home > Planning for Retirement > Getting an Early Start
When it comes to your retirement,
there’s no such thing as ‘fashionably late’.
You know those shoes you bought last month? Comfortable. Wear-anywhere. On sale for $100. You thought, “What a great investment!” But had you invested that $100 in a tax-qualified retirement account, you’d now have something a bit more substantial.
One of the smartest moves you can make is to invest as much as you can in your company’s 401(k) plan. If you’re self-employed, open up a tax-qualified retirement account and invest in it monthly. After all, a comfortable retirement will never go out of style. Here’s how to build a respectable nest egg:
1. Pay Yourself
Make like you’re your own boss and put yourself on the payroll. Take care of the necessities—rent, car payment, credit card bills—then pay yourself by putting some of it into your savings before treating yourself to anything else.
2. Make it automatic
The government automatically deducts taxes from your paycheck to make sure they get paid first. The same principle applies here—save before you can spend. And since it’s easy to forget or get too busy, set up an automatic savings plan. Your money is put away before you even see it, so there’s no time to miss it.
3. Invest 12% of your income before taxes
Financial experts recommend men save at least 10% of their income. But since women live longer, many are now suggesting women save 12%.¹ Think that sounds like a lot? Then start with 6% or 7% and work your way up. You’ll be surprised at how quickly you’ll adjust—and how fast that money will add up.
4. Make it diversified
Since we're talking about building a nest egg, we should also mention the importance of not putting all of your eggs in one basket. When building a portfolio, always know you cannot time the market. You just can’t. The best investment plans include investing in various asset classes. So if one should drop, you’ll still have money in others to balance it out.
Traditional or Roth?
Whether you’re opening an IRA to supplement a 401(k) or because your company doesn’t offer a retirement plan, an IRA is one way to prepare for your future. But there’s still the question of which IRA is right for you. A traditional IRA lets your earnings grow tax-deferred. In certain situations, your contributions may also be deductible from your gross income on your federal tax return without paying federal income tax and a tax penalty. And if you’re changing jobs or are ready to retire, a traditional IRA lets you rollover money from an existing retirement plan, like a 401(k) or a profit sharing plan, without paying a tax penalty. A Roth IRA also lets your earnings grow tax-deferred, but unlike a traditional IRA, contributions to it aren’t tax deductible. You can withdraw your contributions—penalty- and tax-free—whenever you choose and the earnings are federally tax free if you receive a “qualified distribution.”
In general, married couplies need to calculate their deductions separately, but spouses who earn little or no compensation can make full contributions to their own IRAs. Each spouse can contribute up to the annual dollar limit to his or her IRA as long as the combined taxable compensation is at least equal to their combined dollar limits.
What about my family? »