| Retirement planning: Handle debt
wisely |
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Scrimping a bit now will pay off in the long
run. Let's say you're a 25-year-old with a job that pays $25,000
a year and a company 401(k) that matches 50 percent of employee
contributions. If you save 6 percent of your salary -- keeping that
percentage level as your salary rises -- and earn 8 percent on that
money, you will end up with $1.1 million by age 65.
But, "Only you can decide what works with
your budget, but the key is to pay something toward retirement,
no matter how small the percentage," says Ron Meier, a professor
at the College for Financial Planning in Greenwood, Colo.
Another realistic way for this age group to
start saving now is to decide on a percentage of each paycheck to
be earmarked for retirement. Arrange to have a certain percentage,
say, 5 percent deducted from your paycheck and automatically deposited
into a savings account.
Hand-in-hand
strategies
Remember that savings and solid debt management strategies go hand
in hand. One professor suggests adopting a more flexible strategy
for saving, rather than the rigid 20 percent of take-home pay some
planners advise. The "70-20-10" formula breaks savings
goals into bite-sized chunks that are easy to swallow, says Tahira
K. Hira, a professor of family and consumer science at Iowa State
University in Ames.
"Use 70 percent of your take-home pay for
regular purchases, such as groceries, rent or clothing; set aside
20 percent for purchases that cost large sums of money," Hira
says. "Save the remaining 10 percent for retirement -- and
don't touch it."
It's all about finding that balance. Chip away
at debt, sock some money away for savings and still allow yourself
some money for play.
"You've been in college for four years,
probably getting by on the bare necessities, and now you feel it's
time to reward yourself," Hira says, "and that's OK, but
try to put retirement in perspective: 'Will I be able to live the
way I want to live when I'm 65?' "
Insurance
to get -- and not get
Think all this retirement talk boils down to budgeting and saving?
Think again. There's also a thing called life insurance to contend
with.
If you have a spouse, domestic partner or children,
you ought to sign up for life insurance.
An insurance agent,
says Randall Guttery, associate professor of finance at the University
of North Texas, has a legal obligation to give you straight advice
on whether to buy term or cash-value life insurance (although your
decision might affect the agent's commission), so don't mistrust
the agent.
But be a discriminating customer: Seek advice
from more than one agent. Research life insurance over the Internet
and trust your instincts when choosing an agent, advises Harold
Skipper Jr., professor of risk management and insurance at Georgia
State University.
A
dangerous assumption
There's another kind of insurance that you might consider buying
to make retirement as smooth as possible: disability
income insurance that replaces your salary or wages if you are
disabled before retirement and can't work. Without such insurance,
and without a job, you'll have trouble saving anything for retirement.
Don't make the mistake, Skipper says, of assuming
that disability benefits from Social Security and your employer
would cover your living expenses should you become totally disabled.
The benefits might replace your income or they might not. The
Social Security Administration's Web
site explains its disability benefits.
But if you're young, unmarried and childless,
here's where you get a break: You probably don't need any life insurance.
"When it comes to buying life insurance,"
says Skipper, "the underlying question at every age is, 'Will
my death create significant financial hardships for people I care
about?' If the answer to that question is no, either because it
wouldn't create a hardship or you don't care about them, you probably
don't need to buy life insurance."
Michael D. Larson, Holden Lewis
and Michelle Samaad contributed to this story.
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