Saving for retirement

A common mistake made by many is to think you need a certain amount of income before you can start saving for retirement.  Some will say “you need money to make money”; others use the excuse that they barely have enough to live on now.  But nothing could be further from the truth. When we are younger we have more flexibility on our ability to survive.  During retirement years there are too many variables like health that one needs to contend with.  Like a baby learning to walk, with saving you need to start with small concentrated steps, even though they may be unsure steps it is better start basic and build on it.  Even if you feel you are living from hand to mouth all of us have some room within our budget that one can work with – luxury items we can chip away at. 

With the benefits of “compound interest” even if you save say $10,000 between the age of 20 and 30,  stopping when you are starting your family, that amount if left untouched until your retirement will have grown to approximately $92,000, working with hypothetical interest of 6%.  The idea is that you are leaving any earnings along with the principle within the account.  Starting later will of course mean less money at your retirement but every penny counts.

There are many types of retirement vehicles available for one's use, depending of course on your income level, as well as how you earn it.  In prior years Defined Benefit plans were very popular in the private sector, along with your Social Security Benefits one was guaranteed of a comfortable retirement income.  Volatility, high employer costs coupled with responsibility for uncertain obligations have contributed to a significant move from Defined Benefit Plans to Defined Contribution Plans.  For the majority in the USA we have the 401(k) Plans, which are employer sponsored but also afford one the ability to elect a certain amount annually to be deferred into an account up to $17,500 but not more 100% for actual income earned.  For those 50 and over additional $5000 catch up provision is allowed.  Now just because the maximum is $17,500, it does not mean it’s that amount or nothing.  One should not be intimidate by the high amount but instead should defer an amount more in line with one’s own earnings.

It is important to realize that even if it is only $25 per pay period that you can afford, then that is where you begin.  Try this for at least a year or two.  You can then review on an annual basis and I can assure you, once you see how much you put away with the tax benefit of reducing your current taxable income you will increase the deferred amount.  Some employers will match your contribution and this will only increase the amount you are putting away.

The same concept can be applied with Individual Retirement Accounts (IRAs) but in this case the maximum you can put away is $5,500 for the 2013 tax year (catch up provision for those 50 and over being $1,000).  IRAs are privately held and have nothing to do with your employer.  You have until April 15th 2014 to make any IRA contributions - whether it is a traditional IRA or Roth IRA. The main difference between these being that the traditional IRA is funded with pre-tax tax money and Roth IRA is after tax, as well as all growth if withdrawals are qualified.  (Will cover these two in more detail over the next couple of weeks).   As long as you have earned income you can open an IRA account but the IRS does stipulate income limitations on its tax deductibility.   

For those with a lower income there are further retirement saving benefits worth taking into consideration prior to filing your 2013 tax returns.  The IRS (Internal Revenue Service)offers Saver's Credit, which can be up to $1,000 of tax credit for retirement savings of $2,000 for those within the stipulated AGI (adjusted gross income).  In short you are being paid for saving your own for retirement.