Saving for Retirement

The issue of saving for retirement is one that unites Americans from all walks of life. After all, retirees are generally living longer than ever, yet guaranteed employer pensions are going the way of the dinosaur and Social Security faces a very uncertain future. So how do you save for retirement? By understanding the challenges you face, the financial accounts and investment strategies you should consider using, and the budgeting techniques that can help you set aside more as you save for retirement.

Why you need to save for retirement
The Social Security Administration itself points out that Social Security benefits were never intended to provide all the money a retiree will need. Not only are benefits relatively modest (about $13,000 annually per recipient in 2008), but the uncertain long-term outlook for Social Security means that it's now more important than ever to save for retirement on your own. The Social Security Administration expects to begin deficit spending in 2017 and says it will run out of money entirely in 2041 if funding problems aren't addressed by then.

How much will you need to save for retirement? Find out by using a free online retirement cost calculator, such as the "Ballpark Estimate" tool at www.asec.org.

Accounts to help you save for retirement
Employer-sponsored defined contribution retirement plans, such as 401(k) plans, offer several benefits to those who use them to save for retirement. Generally speaking, contributions are made on a pre-tax basis, meaning the money you save for retirement is taken from your pay before income taxes are deducted. Also, any investment earnings can compound on a tax-deferred basis. Your money will, however, be taxed at then-current income tax rates when you make withdrawals. Also, early withdrawals may be subject to an additional 10% penalty tax. But those potential penalties for early withdrawals shouldn't deter you from considering using such a plan to save for retirement, particularly if your employer deposits matching contributions in your account. There are limits on how much you can contribute and how much your employer will match, if matching contributions are offered. Check with the IRS and your employer to find out the current contribution limits.

An individual retirement account (IRA) is another type of tax-advantaged investment account designed specifically to help you save for retirement. There are two types of IRAs: Traditional IRAs and Roth IRAs. Depending on your income, contributions to a Traditional IRA may be tax deductible. Investment earnings are tax deferred. Early withdrawals (before age 59½) may be subject to a 10% penalty, and you must begin taking distributions after you reach age 70.

Contributions to a Roth IRA are never deductible, but you won't be required to pay taxes when you make qualified withdrawals. Also, the IRS does not require you to begin taking mandatory distributions at any age, so a Roth IRA may allow the money you save for retirement to last longer.

A Rollover IRA is a special type of Traditional IRA used by people who want to save for retirement by transferring, or "rolling over," money from a former employer's retirement plan to an IRA.

How to invest while you save for retirement
You want to choose an appropriate retirement investment account because the low returns you'll receive on money in savings accounts and conservative certificates of deposit probably won't provide enough long-term growth potential to keep ahead of inflation. In other words, sometimes you can play it too safe when you save for retirement.

As a result, the vast majority of retirement-planning experts say that it's necessary to pursue financial growth by investing your retirement savings in a diversified mix of assets that complements your specific timeframe, financial goals and personal risk tolerance.

The three main categories of investments, also known as asset classes, are stocks, bonds and cash investments, such as money market funds. Stocks have historically provided the highest average annual long-term returns, but they also deliver the greatest amount of short-term risk. Therefore, the more time you have to invest before retirement, the more you may want to rely on stock investments. As retirement gets closer and you develop a more conservative risk tolerance, it may be appropriate to rely more on bonds. Keep in mind, however, that retirement could last for 20 or 30 years, so stocks may still be necessary even during retirement to help the value of your assets keep the effects of inflation at bay.

Finding the money to save for retirement
The more you save for retirement now, the more financially secure you're likely to be later in life. Therefore, consider creating a detailed budget to guide household spending. Any savings you realize can then be directed to your retirement savings. Also, if you receive an unexpected windfall, such as a tax refund or workplace bonus, resist the urge to splurge. Instead, set the money aside to save for retirement-and plan to enjoy it during your Golden Years.

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