The best time to think about planning for your retirement is long before you ever get to retirement age. Perhaps the best time is when you first begin earning a paycheck.
How many of us enter the work force for the first time with a part time job doing something menial like working at a McDonald’s or something like that? And when the personnel person asks you for the first time whether you want to have anything contributed to profit sharing or 401k what is the answer likely to be?
Of course the answer is probably going to be no. Most kids are not thinking about retiring when they first start working at age sixteen or so (or even earlier). But realistically they should be. And if you are a parent you should be telling your child to think about that when he or she begins working.
Why? Over time money invested in a 401k grows tax free and the contributions are tax deductible. If you assume that a child begins working at age 16 and then retires say at age sixty five then that is almost fifty years of tax free growth for the money invested. Too many kids start saving far too late in life. That is their parents fault and not theirs. But they are the ones who will pay for the mistake.
But what about the rest of us? What should those of us who are already in that boat do about it? Well the obvious answer is start saving now and in a hurry. If you don’t have any contributions to your 401k then you better think about getting some started. Compound interest is your best friend. Money growing in a tax free environment is still going to be a major boon to you once you get to the age of retirement.
Most analysts suggest that you should invest aggressively in your younger years for maximum potential growth. If the market tanks for a while you will still have time to be there for the eventual rebound. If you are closer to retirement then you should be investing more conservatively to avoid major losses of your principal right before retirement.
Don’t forget that you can also invest in an IRA even if you have a company sponsored 401k plan. Most people do forget this and ignore a chance to save more tax free money. If you are contributing to a 401k, however, you cannot deduct your contributions from taxes. Consult an accountant about this subject for more detailed information and legal advice. Also don’t forget that you may be able to do “catch-up contributions” to your IRA after age Fifty. The amounts that you can invest may change over time. Right now (2007) you can invest up to four thousand annually in an IRA and five thousand after a certain age (Fifty I believe). This amount may change in the future and probably will go up.
The key to retiring is saving what you are earning now. This means stop spending on the things you do not need or can live without and invest. Over time virtually anyone can earn decent returns in the market. You can also lose your shirt. I do not advocate taking big risks. Index funds and many mutual funds are safe investments over time. Any investment can lose money in the short term. Be sure to diversify even if you are investing in mutual funds. Some analysts suggest splitting up between three mutual funds for a retirement account. One fund should be a small or mid cap fund and another a large cap fund. The third should be an international investment fund. The general idea is that if the local stock market takes a hit then the international one will still be going strong and vice versa. If big companies are suffering then smaller ones may be doing better. The idea is to spread out the risk over three different areas of the potential markets.
How you choose to invest is up to you. Many companies restrict your options in the company 401k plan to a limited number of mutual funds anyway and you may be stuck with what you are offered. But in your own IRA you can do as you please.
Do not forget that the biggest asset that you own is probably going to be your own home. Many seniors are being encouraged (by the people wanting to provide the financing) to reverse mortgage their home in later years. You can see advertisements about this on TV frequently now and there are probably infomercials on the subject on some cable TV channels. The idea is that the equity in your home could be used to provide you with income (like an annuity perhaps). While I am not necessarily advocating doing this it is something that you should know about and investigate thoroughly.
In summary begin planning early and saving early. Think about the income you will need. Think in terms of tomorrow’s dollars not today’s dollars. What your money will buy you tomorrow will probably be far less than it would buy you today. When you get to the age of retirement you will certainly have some Social Security money coming but you probably already know that money will not cover everything. It may not even cover very much at all by the time you are eligible for it. Think in terms of providing yourself income down the road with the investments you make now in your IRA and 401k.