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So, you know you should be saving for retirement, but what if you don't have the money to save? Here's the good news, you have help. The IRS and many employers will throw in some money, so you can set aside a large sum of money without taking such a large hit on your paycheck.
Let's say your employer matches 50% of your 401k contributions up to 6% of your salary and you're earning $40,000 a year. If you contribute 6% of your salary you'll be putting away $2,400 a year, and you're employer will be contributing another $1,200 a year, bringing your total contribution up to $3,600 every year. This number should mean something to you if you read my last post. This is how much money you'd need to contribute to reach that one million dollar mark at 65, if you started when you were 25 and earn an 8% return.
Also since the money you're investing is pretax, it doesn't lower your paycheck dollar for dollar. This means if you're in that 25% tax bracket, investing $2,400 would only reduce your take home pay by $1,800. That's just $150 a month. If you start saving at 30, you'd have around $670,000 by age 65. Not too bad. Also let's say you get a raise that gives you an extra $100 a month. Instead of spending it, you can put this into a Roth IRA for the next 35 years. At an 8% return, you'll have $220,000 tax free. Don't you just love compound interest.
Even with all the benefits I realize many people can't afford to put 10% - 15% of their money away for retirement. And you shouldn't be setting that much money aside before you have a substantial emergency fund. I recommend having at least 3 - 6 months worth of living expenses put aside, so you'll never have to raid your retirement account and pay steep penalties. Right now, my wife and I have around 2 months set aside, but some of that will be used when the new baby comes along. It takes time to build up a large emergency fund, so don't get discouraged. You should also pay off credit card debt, so you don't have to waste your money paying monthly interest charges. If you need help getting your finances in order I highly recommend following Dave Ramsey's baby steps.
It pays to start saving early. At what age did you start investing in your retirement? If you haven't yet, what's holding you back?
Let's say your employer matches 50% of your 401k contributions up to 6% of your salary and you're earning $40,000 a year. If you contribute 6% of your salary you'll be putting away $2,400 a year, and you're employer will be contributing another $1,200 a year, bringing your total contribution up to $3,600 every year. This number should mean something to you if you read my last post. This is how much money you'd need to contribute to reach that one million dollar mark at 65, if you started when you were 25 and earn an 8% return.
Also since the money you're investing is pretax, it doesn't lower your paycheck dollar for dollar. This means if you're in that 25% tax bracket, investing $2,400 would only reduce your take home pay by $1,800. That's just $150 a month. If you start saving at 30, you'd have around $670,000 by age 65. Not too bad. Also let's say you get a raise that gives you an extra $100 a month. Instead of spending it, you can put this into a Roth IRA for the next 35 years. At an 8% return, you'll have $220,000 tax free. Don't you just love compound interest.
Even with all the benefits I realize many people can't afford to put 10% - 15% of their money away for retirement. And you shouldn't be setting that much money aside before you have a substantial emergency fund. I recommend having at least 3 - 6 months worth of living expenses put aside, so you'll never have to raid your retirement account and pay steep penalties. Right now, my wife and I have around 2 months set aside, but some of that will be used when the new baby comes along. It takes time to build up a large emergency fund, so don't get discouraged. You should also pay off credit card debt, so you don't have to waste your money paying monthly interest charges. If you need help getting your finances in order I highly recommend following Dave Ramsey's baby steps.
It pays to start saving early. At what age did you start investing in your retirement? If you haven't yet, what's holding you back?
2 comments:
When it comes to retirement I think even small amounts early will make a big difference. I agree that your financial house (debt, emergency fund) should be in place before saving for retirement. My wife and I started investing for retirement at age 20. Hopefully those early small steps will allow us the serve God in any way he calls.
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