Solving 3 big money challenges |
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3. Preparing for retirement
Few financial tasks are as overwhelming as figuring out how you'll
wind up playing golf in your sunset years.
Some 44 percent of retirees didn't start thinking
seriously about retirement until a year to six months before they
left work, according to the Employee Benefits Research Institute.
To fare better, you'll need to start saving now.
"For someone who's done nothing, they should adopt
a systematic plan of saving. It's very difficult because costs are
rising, but it's essential to have some cushion," says Bill Baldwin
of Pillar Financial Advisors in Waltham, Mass.
When saving for retirement, keep a well-diversified portfolio of stocks, bonds and fixed-income instruments. A Certified Financial Planner can help you settle on the right mix based on your goals and investment time horizon.
Diversification is crucial to avoiding a portfolio meltdown that can put your retirement in jeopardy.
People commonly make the mistake of putting too many eggs in one basket. For example, the average 401(k) plan has 22 percent of assets invested in company stock, according to Hewitt Associates.
"No one stock position should be more than 5 percent of their net worth unless it's a company they control," says Baldwin.
Given the recent stock market meltdown, Baldwin offers a sage reminder.
"Even the best of stocks run into problems," he says.
Where should you save your retirement money? If your
employer offers a 401(k) and chips in matching funds on your behalf,
begin there. Save at least enough to qualify for the employer match.
Money you put into your 401(k) comes
out of your earnings on a pretax basis. Profits grow tax-free, with
taxes due when the money is withdrawn.
You may also have the option of saving in a Roth 401(k).
Contributions are made on an after-tax basis, but you'll never owe
taxes on your earnings. For that reason, experts say they're a better
choice for those who expect to pay higher taxes in the future.
In 2008, individuals can save up to $15,500 of pretax earnings in a 401(k). For those who will be 50 or older by year's end, the limit is $20,500.
If you don't have a plan at work, open an individual retirement account. In 2008, you can stash up to $5,000 in an IRA, and up to $6,000 if you're 50 or older.
Ed Slott, editor of the IRA Advisor, recommends the Roth IRA for most people because you'll never owe taxes on earnings and you are not required to withdraw money at a certain age. By contrast, people with 401(k) or traditional IRA savings must start withdrawing money beginning at age 70½.
"With tax rates most likely rising in the future, you're better off building a retirement account you don't have to share with the government," says Slott. "I think they're better for everyone."
For more about investing for retirement, see the articles
on Bankrate's Retirement
channel.
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