It's a simple truth, but one for which many people need a reminder. You can't borrow your way to wealth and you can't borrow your way through retirement. Fortunately, it's not difficult to get started . All you need to do is make retirement saving a priority and begin investing. These tips can serve as a reminder to keep your retirement planning on track.
Make retirement contributions a priority. Short term financial goals like buying a new car or taking a vacation are great and so is saving for your child's college tuition. But a new car and an Ivy League education for junior won't seem so important if you are struggling to make ends meet during your retirement years. Retirement contributions don't need to be the main financial goal in your life, but they need to be somewhere in the mix. Treat retirement contributions like a bill and add it to your monthly budget.
Make it automatic. Automatic retirement account contributions make it painless to invest on a regular basis. Perhaps the easiest method of automatic investing is set up payroll contributions to your 401(k) plan. Most companies will automatically enroll you in their company sponsored plan when you start working with them. If your company didn't do this for you when you started working with them, call your human resources department and enroll in your 401(k) plan. Contributions will automatically come from your paycheck and you may be eligible for free money through a company sponsored matching contribution. If you don't have access to a 401(k) plan or similar type of retirement account, you can always set up automatic contributions from your savings or checking account to make investing easy.
Maximize tax benefits. There are tax benefits to making contributions to qualified retirement accounts such as 401(k) plans and IRAs. Traditional IRA and 401(k) plan contributions are tax deferred. That means you don't pay annual income taxes on the income you use to make the contributions until the funds are withdrawn in retirement. Your money grows without the drag of taxes until you reach retirement age. Roth IRA and Roth 401(k) contributions are taxed in the year you earn it, but the money is not taxed when it is withdrawn in retirement. Both retirement plan options can be used to give you tax diversified retirement income.
Don't touch retirement accounts early. Some investments are made to be spent in a relatively short time frame, but others are meant to be left alone until you reach retirement age. Be sure to separate your investing goals appropriately. Take advantage of the long term tax benefits of making contributions to your retirement accounts. But if you might need the money in a few years, then invest in a taxable investment account because the retirement account early withdrawal penalties will destroy the value of your retirement savings. Early withdrawal penalties include an immediate 10 percent tax penalty, plus regular income tax on the amount withdrawn. Depending on your tax bracket, you could lose 30 to 40 percent or more of your withdrawal to taxes and penalties. You also hinder your retirement account's growth potential. Raiding your retirement accounts can give you some needed cash, but you will pay a hefty price.