Save Now or Slave Later

"I assume the company will take care of me."  That's what our newest employee said the other week when I asked her if she planned to contribute to our company's 401(k) plan.  RetirementLane.jpgShe opted not to contribute.

Mind you, our company has a generous 401(k) plan that contributes a significant amount of money on behalf of each employee each year.  So maybe she need not worry about contributing.  But why would she not want to do more to help pave the path towards her future retirement?

It is difficult getting motivated saving for retirement when you are young.  We would love to spend our hard-earned money today rather than save it for later.  Besides, who knows, we might get hit by a bus or something and not need the money, right?

Come on now, get realistic.  Most of us will live at a minimum 70 to 80 years.  So if you want to enjoy these older years without constantly worrying about money, ya better start saving TODAY!  No excuses. 

And if you think you can survive off of the $1000 per month average Social Security payout, you must have an extremely low-cost lifestyle.

So keep the following in mind to get your retirement savings plan on track:

1. If your company has a 401(k) plan with an employer match, you've got to contribute at least enough to achieve the maximum employer match or you are leaving money on the table.  For example, if your company matches 50% per dollar on up to 6% of wages, then contribute 6% of your wages!  Other than making good towards your retirement, you'll also be contributing on a pre-tax basis, effectively not paying taxes on you and your employer's contribution to the plan.

2. If you can afford to contribute more described in #1 above, consider opening a Roth IRA account.  A Roth IRA allows you to invest after-tax money but any and all distributions (after 5 years in the plan and reaching age 59 1/2) are TAX FREE! 

Another benefit of a Roth IRA as compared to a 401(k) or "Traditional" IRA is that there are no "forced" distributions.  You can leave the money in there growing tax-free as long as you want.  401k plans force you to start withdrawing by age 70 1/2.

Wouldn't that be nice?  You've got a little money coming in from Social Security, you've got distributions from your 401k that are taxable, but you also have access to tax-free distributions from your Roth IRA.

But Roth does have its can contribute only up to $4000 to $5000 (2007) per year per person, only a small fraction of what your 401(k) plan allows.

3. Next, if you can save even more money than that required to achieve a full employer 401(k) match and to max out you and your spouse's Roth IRAs, then put MORE into your 401(k) much as you can up to federal limits

4. In 2006 Congress created Roth 401(k) plans.  These have the same rules and limitations of "Traditional" 401(k) plans - the difference is that contributions are made "after-tax" and distributions are tax-free. 

If your company offers a Roth 401(k) option, seriously consider it, especially if you think you will be in a high tax bracket when you retire.  This is hard to figure out because no one can predict the future.  So what you might wanna do, like I did, is split your 401(k) plan between Traditional and Roth. 

5. "Traditional" IRA plans came about in 1981 and are still a viable alterative.  They are similar to 401(k) plans in that contributions are pre-tax and distributions are taxed as you withdraw them (you must start withdrawing by age 70 1/2).  Contribution limits are shared with Roth IRAs.  However, I personally don't see much reason to invest in a Traditional IRA given the other alternatives.

So don't make the mistake of thinking your finances in retirement will be "taken care of."  Save money now to ensure you live a happy, comfortable retirement down the road.