Retirement: What Should I Save, When?
Copyright © 2006 Vasrue.com, All Rights Reserved
Written by: Robert Wade


Who can save for retirement? It's hard enough just keeping up
with today's expenses. But like it or not, a fairy godmother is
not going to appear in your later life to take care of you. You
need to plan ahead, and the sooner the better.

The younger you start saving, the more you benefit from
compounding, meaning your money makes money. The longer you wait,
the more money it takes to reach the same financial goal.

Generally our retirement years are funded by pensions, personal
savings and social security. A pension is a job perk generally
offering a fixed lifetime income during retirement. Employees
rarely pay into this plan, as its fully funded by their employer.
Other forms of pensions include defined-contribution plans, which
allows your own cash contribution like profit-sharing plans, and
employee stock ownership plans (ESOPs), where employees purchase
stock from the company. So the more money the company earns, the
better the employee. (Though we all know what happened with
Enron. So use ESOPs at your own risk.)

401(k) retirement savings plans are possibly the best and most
convenient ways to save. With a 401(k), your employer sets aside
a certain amount of money from your paycheck each month. This
contribution is tax exempt, so your net income isn't effected
quite as dramatically as it would be under pre-tax circumstances.
Because the money is funded before you even see it, 401(k) plans
are excellent for people with limited discipline. If your
employers offers a 401(k) plan, it's in your best interest to
make the maximum allowable contribution.

If you're self-employed, you should open a Keogh plan. This may
include a profit-sharing Keogh, usually the best to start with
giving you high contribution limits and the affiliated tax
deduction, a money-purchase Keogh, best for higher income
individuals, a combination Keogh, merging the first two options
by offering the largest contribution with the ability to pull
back if money ever gets tight, and finally the defined-benefit
Keogh, offering a fixed annual retirement income, ideal for those
50 or older at retirement. If you have absolutely no employees,
you can also invest in a Simplified Employee Pension, or SEP.
SEPs are much like profit-sharing Keoghs, but handled as an
Individual Retirement Account (IRA).

When allocating your funds, a rule of thumb is to invest
aggressively through your 20s and 30s, balancing risk in your 40s
and 50s, then remaining conservative thereafter. Aggressive
investments include large cap stocks, with small cap and foreign
stocks being a moderate, fixed income and cash investments being
conservative, low-growth options. While allocation can be
complicated, try this old trick: Subtract your age from 100.
Invest the percentage equal to your age in bonds and the
remainder in stocks. Once you've established your ideal asset
allocation, review it annually to ensure you have the best pool
for your savings goal, income level, tax bracket and tolerance
level.

So whether you’re 20 or 55, your retirement savings plan is a
critical factor in your overall financial health. Plan it, review
it and ensure for your security in years to come. If you have
questions or need professional guidance, schedule an appointment
with a qualified investment company.

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Copyright (c) 2006 Vasrue.com. All Rights Reserved.

Robert Wade writes about Finance. For more great articles on
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