Sunday, February 22, 2015

Saving for Retirement: Yes, you can!

I've been playing around with personal investment strategies lately, trying to find the right mix that will earn me the best return. With so many options to choose from, the process can be confusing. Even with prepackaged funds, like mutual funds that are established with a mix of asset classes such as stocks, bonds, and CDs, it can still be a matter of serious consideration over which portfolio to choose from.

I have found through my experimentation and research that the retirement fund is the best return for an investor, especially if you're working with a company that matches any of your contributions. Even if you go at it alone, contributing a portion of your income to your retirement account, you still earn a considerable return. Your contribution will eventually grow, whether or not you have a company that contributes.

There are two ways to prepare for retirement. You can invest in a 401k and have money withdrawn before taxes - your gross income - every time you receive a paycheck. The benefit to a 401k is that your money grows faster because you're setting aside pre-taxed money. You are liable to pay taxes once you retire and start withdrawing, but at that time you should be in a lower tax bracket.

Another retirement option is the Roth IRA, which allows investors to save a portion of their after-tax income. Once retirement rolls around and you start using the money, you won't be liable for taxes since that was taken care of during the course of your savings.

Whichever method you use is personal, and there's always the option to hold both accounts. Many financial advisors highly recommend this latter strategy because it offsets your tax liabilities in the future.

While the retirement fund is an excellent way to plan for the future, there are some restrictions you must keep in mind.
  • You can potentially withdraw from your fund early, but you will be penalized with taxes by the IRS. You can also borrow against your retirement fund, but it must be paid back within 60 days unless you want taxes and penalties added to the borrowed amount.
  • There is a maximum threshold you can contribute to a fund during any given year. For 2015, it's $5,500 for both types.
  • If you change jobs, opt to roll over your investment to another account, preferably one that is employer-sponsored. This means that your employer will match a portion of your contributions. If you cash out an investment from a prior job, you're still responsible for taxes and penalties. Transferring your account will save you from having to pay those fees.
Don't fall for the excuse that you can't afford to save for retirement. Starting out small is better than never starting at all. It's also smarter to start now with small amounts than postponing your investment. As you earn more, you can increase the amount of money you contribute to your retirement fund. Plus, any money that goes into your account throughout the year reduces your taxable income.

It's a fallacy to believe that you can't save if your company doesn't offer a retirement account. Remember that your funds are set up with a diverse portfolio of assets and your money will grow anyway. Retirement funds are set up to grow in a particular way to help you prepare for that time when you're no longer working. Besides, the difference between a matched and unmatched funds is usually small. Either way, it's free money that will secure your financial future.

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