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Friday, July 24, 2009

Think Retirement!

Do you envision your retirement as a relaxing time spent traveling around the country (or the world), taking a cruise, enjoying hobbies and interests you never had the time or energy for while you were working? Without wise planning, you could end up spending your golden years working at the golden arches for minimum wage instead. Unless a job at McDonald's at the age of 65 is just your cup of tea, start planning for your retirement now.

If you're counting on Social Security to finance your retirement, think again. Many elderly Americans with Social Security as their sole means of support are living in poverty. Social Security should not be considered your primary source of retirement income. There's also the question of whether Social Security can survive the onslaught of baby boomers who will start to retire in a few years and no longer contribute to the Social Security coffers.


It's never too early to start planning for your retirement. In fact, compounding of earnings is so powerful that those who start saving for retirement in their 20s can amass large nest eggs with relatively little effort, as long as they invest regularly. For example, a 25 year old who invests $2,000 a year for eight years and never invests an additional dollar after the age of 33 , will earn more by the age of 65 than a 34 year old who invests $2000 a year for 32 years, even though the 35 year old invests four times as much.


One of the best retirement vehicles available is your employer's 401(k) Plan. Not only can you make pre-tax contributions, thus reducing your taxable income, but the earnings grow tax-deferred until retirement. Best of all, your employer may match a portion of your contribution. Many employers match 50% or more, giving you an instant 50% return on your investment (subject to vesting). One financial planning expert has said that not participating in your employer's 401(k) plan is like seeing hundreds of dollars lying in the street and not picking it up.

Another excellent retirement tool is the IRA (Individual Retirement Account). A traditional IRA allows pre-tax contributions to grow tax-deferred (you don't pay taxes until you withdraw the money, so the amount you would have paid in taxes earns income from the time you contribute it until you take it out). The Roth IRA allows after-tax contributions to grow tax-free (you pay taxes on the contribution, but you never pay taxes on the earnings) as long as you wait until you're at least 59 1/2 before withdrawing the money).

There are retirement plans to fit nearly every situation: 401(k)s for businesses, 403(b)s for tax-exempt organizations, SEP-IRAs and SIMPLE-IRAs for sole-proprietors and small businesses, KEOGHS for the self-employed, and one type of IRA or the other for everybody. Choose one available to you and start contributing today.
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