Financial Literacy 2007 - Retirement
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Retirement planning for people in their 30s

You work hard and your paycheck reflects your achievements. But, at the same time, there is a dizzying array of new ways to spend. Maybe it's saving for your first home or you just signed on the dotted line for a hefty mortgage. There may be one baby, or more, to provide for. Even the dog is begging for more food.

Kick off retirement savings
  1. Ramp up 401(k) savings.
  2. Save outside of work, too.
  3. Maintain an aggressive asset allocation.
  4. Keep company stock in check.
  5. Don't let a better job derail your retirement plan.
  6. Start preparing for college.
  7. Protect your earnings with disability insurance.
To be sure, establishing a home and family is expensive, and it's easy for retirement to seem like an impossible goal for individuals in their 30s.

"You can't always do it all," says Dick Bellmer, chairman of the National Association of Personal Financial Advisors.

So breathe easy. You won't have to reach all of your goals at once. But, retirement should remain your top priority. That means you'll need to work hard to balance spending with saving. Here's how:

1. Ramp up 401(k) savings

Ideally, you'll want to make the maximum annual contribution limits into an employer-sponsored fund, such as a 401(k). For 2007, that's $15,500. As you move up the career ladder, put raises into your retirement savings, don't spend them. If you can't afford to stash all of your pay increases into retirement funds, gradually increase contributions over time, says Dee Lee, a Certified Financial Planner and author of "Women & Money."

"Let's say you've got 3 percent in your 401(k) to qualify for the company match. Add a bit more. Then maybe add another percent of your salary a few months later, so eventually you're saving 10 to 15 percent of your income," says Lee. "You won't miss the money if you increase saving slowly."

You'd be surprised the difference that even an incremental, 1-percent increase can make in the long run. For example, a 30-year-old who saves 6 percent of a $50,000 salary, or $3,000 a year, will have nearly $840,000 banked by the time she has to start taking funds from her 401(k) at age 70½. (This assumes an 8 percent annual growth rate.) If she boosted her yearly contribution by just $500 she'd have nearly $980,000. That's a difference of nearly $140,000.

2. Save outside of work, too

If you're already putting as much as you can into a 401(k) or other employer-sponsored fund, pat yourself on the back, then open a separate, personal IRA. This year, individuals under age 50 can save up to $4,000 in a Roth IRA, a deductible IRA and a nondeductible IRA, subject to income limits.

Which one's best for you? Ed Slott, editor of and author of "Your Complete Retirement Planning Road Map," believes that everybody should open a Roth if they can. That's because you save with after-tax dollars but the earnings on your investments grow tax-free forever. Plus, unlike many other retirement plans, you never have to cash out a Roth. Earnings can grow as long as you want.

Now for some fine print: In 2010, anyone can convert to a Roth IRA. Until then, you'll have to meet certain income requirements to open one, says Slott. For single taxpayers, eligibility phases out when your income tops $114,000 in 2007. For married couples filing a joint tax return, the maximum eligibility limit is $166,000.

If you currently don't qualify, look at the deductible IRA. It has no income requirements as long as you're not enrolled in an employer-sponsored retirement plan. You get a deduction for your contribution and earnings grow tax-deferred, which means you pay income taxes when they're cashed out. A nondeductible IRA lets earnings grow tax-deferred, too, and it's open to anyone.


3. Maintain an aggressive asset allocation

It's not just enough to save. You also need to keep an eye on existing retirement assets to ensure you're not squandering opportunities for growth. Someone in his 30s needs to invest aggressively, allocating up to 80 percent or even 90 percent of assets to a diverse array of stocks, says Ellen Rinaldi, executive director of investment planning and research at Vanguard.

That's the track Todd French is following. At 35, French already has much to show for his ingenuity and hard work. It wasn't long ago that he was scraping by as a music major on a college scholarship. Back then, he couldn't even afford to repair his cello, so he learned fix the instrument himself.

And that's how his company, Stringworks, was born. The online music boutique manufactures high-end, moderately priced stringed instruments for rent or purchase. Business has soared, clearly; French's latest passion is racing Porsche automobiles. He also works a second job, one he loves, as a cellist for the Los Angeles Opera. And he just invested in a software company. His willingness to plow money into a startup enterprise makes him, he admits, somewhat of a risk taker.

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