By Wendy Mihm | Monday November 29, 2010
This article has one purpose: to motive you to get started investing now.
Maybe your house is a mess – yesterday’s apple juice is still vaguely sticky on the kitchen counter and there are Legos stuck in Play-Doh on the windowsill. Maybe you are busy negotiating with your kids to do their homework and your husband to roll that giant bin of recyclables to the curb. Retirement seems a million light-years away. But you owe it to yourself to invest in retirement savings, because those quiet years are creeping up on you, one loud, crazy day at a time. And one day, sooner than you think, the door will bang shut behind your youngest child and the house will be strangely quiet.
Then you will have all the time in the world to figure out how to set money aside into a tax-free shelter, but by then it will be too late because that money won’t have sufficient time to grow.
Listen to the very different stories of these two couples (names have been changed to protect the regretful and the smug).
Couple #1: Allen and Nisha, 57 year old parents of 3 grown girls.
Allen: “I was always torn about how to invest for our retirement. It just seemed like we needed as much money as we could get for the things we wanted to do…”
Nisha: “I really wanted the girls to go to fun camps and things, you know? To have beautiful dresses.”
Allen: “But we still put money into my company’s 401k. We put in 5%. Not enough to earn the company’s match, but we though it would be good enough over time to help us retire.”
Nisha “I guess I thought that because he was putting money in, we would be fine, with that and social security, but now we have just over $260,000. Not really enough to last very long. Our house is not paid off yet and we are both pretty healthy and expect to live well into our 90s. I’m not sure what we are going to do…”
Allen: “Work longer, I guess.”
Couple #2: Alicia and Mario, 60 year old parents of two grown boys and one girl in college.
Alicia: “I pushed hard for it because my Dad had taught me all my life to max out my 401k. So I maxed mine out for all the years I worked. Then I coaxed Mario to max his out, which he eventually did.”
Mario: “I really wanted to rely on my pension and did not like the idea of maxing out the 401k because it came out of my paycheck! But I am so glad I did because our company eventually eliminated pensions before I ever got mine.”
Alicia: “He’s been maxed out and earning the added company match of 2.5% for over 15 years.”
Mario (smiling and squeezing Alicia’s hand): “We have over $780,000 saved up for our retirement!”
Alicia: “And because it was done automatically, we never felt like we were depriving ourselves of anything.”
Mario: “I’m taking her to Paris!”
Which of these couples would you rather be?
Clearly, the one with more money. So what should you do? Get started investing now.
Well, the easiest and first thing to do is to make sure that you and your spouse are contributing enough to your respective employer’s 401k plan to earn the company match. To contribute less than that is just not too bright. Why? Because you are turning down free money from your employer. Let me say it again. You are turning down free money from your employer. You’re smarter than that. Go get your free money. Now.
Ok, already done that and want to do more? Good for you!
Research shows that the next place to go after earning your employer’s 401k match is the Roth IRA if you qualify, so that just might be worth considering. The big deal about the Roth IRA over the conventional IRA is that when you take your money out to spend it during your retirement years, you will not be taxed on those withdrawals. Ever. The catch is, not everyone can take advantage of a Roth IRA – they’re only for use by people under a certain income bracket.
The table below outlines the Roth IRA income limits so you might want to check that out to see if you qualify.
|Tax Filer Status
||Roth IRA Participation / Contribution Rule
|Single Filers, Head of Household, or Married Filing Separately
||Modified Adjusted Gross Income up to $105,000 = full contribution|
Phase-out contributions allowed for people earning $105,000 to $120,000
Eligibility for Roth IRA participation ends entirely for those earning $120,000 or above
(Married Filing Jointly)
|Modified Adjusted Gross Income up to $167,000 = full contribution|
Phase-out contributions allowed for people earning $167,000 to $177,000
Eligibility for Roth IRA participation ends entirely for those earning $177,000 or above
If you hate tables, here’s what it said: if you’re single or filing separately, you can participate at some level in a Roth IRA if your gross income on your tax return is less than $120,000. If you’re married and you file a joint tax return, you and your spouse can put money into a Roth if your gross income is $177,000 or less.
The next thing you’ll need to know about is contribution limits if you decide to go the Roth IRA route (and if you qualify), but I don’t want to lose focus on the main point of getting started investing, so we’ll save that topic for another article. What you need to do is to get started investing in something—whether it’s a Roth IRA, your employer’s 401K match program or something else—just get started.
And if you are already earning both your employer’s 401k match and contributing to a Roth IRA or traditional, big congrats to you, because you, my friend, are well on your way to living a healthy, happy financial life. Woot!
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