Maximize Your Retirement Plan
I can hear your protests now: "But, David, I can't afford to put away more than I do." Here's why I know that you can. If you are investing using a retirement plan like a 401(k) or an IRA, then every dollar you invest actually costs you less than 70 cents.
How is that possible? It's the magic of pretax investing. As we know all too well, every time we earn a dollar, before that dollar ever makes it onto our paycheck, the government grabs something like 27 cents in federal income withholding taxes (often more—and before very long probably a lot more). On top of that, local governments may grab another 5 cents in city and state withholding. (Exactly how much depends on where you live.) And then there are Social Security taxes, Medicaid and unemployment. But it doesn't have to be that way. If you are contributing to a pretax retirement account—like a 401(k) plan or an IRA—the money you put in is entirely tax-deductible (up to certain limits). In other words, it comes in off the top, before Uncle Sam takes his bite. You get to keep the whole dollar for you and your future.
What this means is that if you decided to start saving an extra $50 per paycheck in your 401(k) or IRA, you would not see your take-home pay go down by $50. In fact, it would go down only by $35. The $15 that normally would have gone to the taxman goes to your future instead.
And if your employer has a matching program, you may be able to add another $25 to that $50. In other words, a $75 investment is costing you only $35. If you have ever shopped a sale, how can you refuse a bargain like this? The bottom line is that you can save much more than you think, easier than you think.
What I'm talking about here, of course, is the tried-and-true concept known as "paying yourself first"—putting some of your hard-earned wages into your retirement account before the taxman takes his cut. I'm going to be blunt here. If you want to be financially secure and ultimately finish rich, you have to do this. There is absolutely no way to start over and finish rich if you allow the government to continue muscling in ahead of you. I mean, think about it—how can you possibly expect to get anywhere if you're willing to give up 30 to 40 cents out of every dollar you make before you ever have a chance to spend—or invest—a penny of it? There's no getting around it. You must pay yourself first. Not doing it is simply not an option.
By now, I hope you are convinced that there has never been a better time to be saving for your future. Even if you have to start small. So if your employer offers a 401(k) plan and you are not already enrolled, call your benefits office today and find out how to sign up. If your company doesn't have a 401(k) plan, you will need to set up your own individual retirement arrangement (IRA).
Details on how to do this—and everything else you need to know about IRAs for 2010 and beyond—are available in a special report I've posted on my website. You can download it for free from FinishRich.com/retirementreport.
Depend on Your Younger Self Now
No one is going to take care of you or me the way we would like to live when it comes time to retire. There are simply not enough taxable dollars to go around to support the 150 million Americans who will reach retirement age over the next 50 years. You know it and I know it. All we can count on is ourselves.
There's only one real way to guarantee yourself a comfortable and secure retirement: You need to depend on your younger self now. You will save yourself tomorrow by deciding to save yourself today.
The time to take action is now. So please take action. Get back in the game. Increase the amount you are saving for retirement. Decide to pay yourself first. Review what you are invested in and fix it if it needs fixing—and get help if your plan offers professional guidance. This is the heart of your "Start Over" plan. Please get it going today. I promise you—your older self will thank you later.
8 things to do this year to boost your retirement savings
- If you have stopped contributing to your retirement account, start again immediately.
- If your employer offers a 401(k) or similar retirement plan, make sure you're signed up and contributing. If you don't have a 401(k) at work, you should have your own IRA.
- Know exactly where your money is invested. Pull out your retirement account statement and find out what your savings are invested in.
- Using Morningstar.com, compare your investments' performance to others in the same asset class.
- Determine what level of risk you're comfortable with—and what's right for someone your age. Then make sure your investments reflect that.
- Consider "target date" mutual funds so you don't have to rebalance your investments yourself every year.
- If you don't feel comfortable making these decisions yourself, get help from a qualified financial professional. Ask your employer if your plan offers a free or fee-based advisory service, or find one from the several recommended in this chapter.
- Increase your retirement contributions today, and if you don't feel the pinch, raise them some more. Your goal is to reach the maximum contribution allowed.