Saving for Retirement

Saving for Retirement

In order to live a frugal lifestyle, saving smart is just as important as spending smart. Some of you may want to work the rest of your lives, and that is perfectly fine, but saving money now could avoid a huge money problem in the future. You never know when something will happen, like an accident or an illness that leaves you with no employment options. It is always best to be prepared, and if you haven’t thought about saving for retirement already, the time to start is now.

Why start now?

When you’re just starting your career, it is hard to think about retirement because it feels so far away, but in reality, putting money away when you are young will help you save more in the long run. As long as you put your money in the right places, it will collect interest, and if that money has more time to compound that interest, you will have a lot more when you want to retire.

Some of you may have been waiting for a better time in your life to start saving for retirement, but the thing you have to realize is that there is never a good time to start. There will always be that piece of furniture you have to buy or that trip you want to take, and putting you retirement on the back burner will only make it harder for you to save enough in time.

The right and wrong way to save

When most people decide to start saving, they use the money that they need every month and then put the rest away, no matter how much that amount may be. Some months, that amount may be nothing because they had to spend all of their earnings that month. In most circumstances, this can be avoided.

When you commit to saving a specific amount each month, and treat that amount like any other payment or bill you have, you can guarantee that your retirement fund will increase at a steady rate. When you budget the money you have left, living between paychecks will be manageable, and you are still able to save.

Getting started

Before you jump into a saving plan, make sure you consider your options. Do some research and find out what plans are right for you. Find out if your company offers 401(k) matching contributions, look into investments that might help you in the long run, or see if an IRA is your best option. Also, there are calculators you can find online to help you figure out how much you will need to save each month in order to retire at a certain age with a specific amount of money.

401(k) accounts

A 401(k) is a great deal for two reasons: you get tax breaks, and, if your employer is willing to make a matching contribution, you also get a bonus from your boss. The money that is placed in the 401(k) is taken out of your paycheck before taxes are deducted, so you avoid paying taxes on this money initially. The money placed in this account compounds every year with no tax penalty until you are ready to retire. However, when you are ready to withdraw this money, you will have to pay taxes on the money you made, the money your employer gave to match that contribution, and the compounded interest you made over the years.

IRA accounts

The money you place in an IRA is different because the money you place in this account can grow and compound interest without the threat of tax. You can also avoid taxes on the money you put into or take out of the IRA, depending on whether you choose a traditional or a Roth IRA.

This plan may seem great, but there are limitations with the IRA. Most people under 50 years old can only put $5,000 in their IRA each year. Also, in order to get an IRA in 2010, your household income would have had to be less than $167,000 if you were married and filing jointly and $105,000 or less if you were single.

No matter which option you choose, make sure it will be right for you long term. Saving for retirement doesn’t have to be painful to your pocketbook. With a little planning, you can live comfortably now and still be able to look forward to a happy retirement.

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