It’s no secret that the average American is not saving enough for his or her retirement. The sad truth is that most Americans have no savings at all – the average family is $10,000 in net debt! For years, men and women could depend on company pensions for their retirement.
If that failed, there was always Social Security to bail them out. But with pensions going the way of the dinosaur and Social Security also on the path to extinction, retirement saving is more important than ever.
In fact, if you don’t begin saving for your retirement now, you may not have any retirement to look forward to at all – you could be working until the day you die, and that’s no way to spend your golden years. So now that you know you need to save and invest, what is your ultimate objective? How much will you need for retirement?
Retirement Tip – Open an Individual Retirement Account (IRA)
Individual Retirement Accounts allow you to save money for retirement, tax-deferred. There are two types of Individual Retirement Accounts – the traditional IRA and the Roth IRA – but the most important thing to understand is that an IRA is a type of account, not an investment product itself.
Often you’ll hear people talk about IRAs as if they are savings bonds, CDs, or mutual funds, but these are merely things that would go in an Individual Retirement Account – an IRA is a tax sheltered account specifically for retirement savings, more like your checking account than an investment product.
The best thing about IRAs is that they allow you to save for retirement without having to worry about Uncle Sam’s share. A traditional IRA lets you make tax deductible contributions of up to $4,000 per year to your account – this means if you fully fund your IRA, you will have a $4,000 write-off on your taxes!
The money you put into the account can be used to buy stocks, bonds, or almost any other type of investment. As your IRA grows in value, you never have to pay any taxes on capital gains – even if you sell stocks within the account for a profit!
However, when you begin withdrawing money from the IRA (you’re eligible to start at age 59 1/2), you are taxed on the full amount of your withdrawals at your regular income tax rate.
For most people, a Roth IRA is even better. It allows you to make after-tax contributions – meaning you won’t get that $4,000 tax write-off – and otherwise, works much like a traditional IRA. So how can a Roth be better? Because since you’re using after-tax money, Uncle Sam will never, ever be able to tax your account’s earnings.
This means that if you build up $20 million in your Roth IRA, you won’t owe the government one dime when you start withdrawing your loot!
So How Much Will You Need for a Comfortable Retirement?
Retirement experts say people turning 65 in 2006 will need approximately $1 million for retirement. This may seem like a lot, but with life expectancies rising every year, it’s understandable.
A liquid net worth of $1 million would allow you to buy government bonds that paid $50,000 a year in interest, and you’d get your principal back at the end of the bond’s term.
For your retirement, you will need to determine the inflation adjusted equivalent of $1 million. Figure inflation at 3 percent a year, and see how much you’ll need. Then determine how much you’ll need to save each year at 8-10 percent return on investment, in order to achieve that much.
Thanks to the power of compound interest, the sooner you start saving the better. So get started today if you want to have a leisurely retirement. You’ll thank yourself in your old age!