Maximizing your contribution to an employer’s pre-tax retirement plan may be the best way to start building a nest egg for retirement.Generally, financial planners say, that means funding a 401(k) plan at work.
“It’s the pre-tax nature that makes it less painful,´ said Dot Cada, a certified financial planner in Fort Collins. Because of tax savings, an employee who funds a plan at 15 percent is paying out only 10 percent from his or her paycheck, she said.
The higher-paid worker gets a better break on contributions because of pre-tax savings, she said.
Cada recommended automatic debit from a checking account into the retirement fund.
She pointed out that individuals can borrow up to half of the money from their 401(k) plan for education, housing or medical expenses.
"You can borrow half of what˜s in there, and it˜s not taxable," she said. This is a good way for young people to save money to buy a house and then pay themselves back through the plan.
Workers who don˜t have a pre-tax retirement plan at their job can contribute up to $2,000 to an Individual Retirement Account. That works out to putting aside $167 a month over the course of a year, she said.
Cada said many mutual funds offer automatic debit through an individual˜s checking account each month.
"At the end of the year, you may get a tax refund," she said.
Even people with high credit-card debt can take advantage of pre-tax savings plans at work while they˜re paying off their debts, she said.
Cada said she advises people with heavy debt to go ahead and contribute to their pre-tax savings plan at work up to the employer˜s matching rate. Then she recommends paying off the highest credit card first so they˜ begin to see some progress in debt reduction.
"I tell them to put their credit cards in a plastic cup with water and freeze them. You can˜t microwave it and zap it immediately," she said.
By setting aside the credit cards, the individual will have to use cash but still has credit cards for emergencies, she said.
She also advises clients to not use pocket dollars since they disappear quickly. Instead, she recommends writing checks to easily track where the money is spent.
In the past, American workers prepared for retirement through a three-pronged plan — a company pension, personal savings, and federal funds such as Social Security payments. But today, the individual must assume more responsibility for retirement planning because pensions are rare and the future of Social Security payments is questionable.
Another way to save for retirement is to pay down a home mortgage early. By paying more on a monthly basis, the length of the loan will be reduced.
"It˜s also good to realize that the less you spend now means the earlier you can retire," she said. She advised establishing a savings plan and then moving into stocks or mutual funds to get a higher return. Tax-deferred annuities also are attractive for people with high incomes, she said.
And there are mutual funds available today that don˜t require any minimum contribution, she said.
Vickie Bajtelsmit, associate professor of the finance department at Colorado State University, said the best way to save for retirement is to start setting aside some amount of money on a regular basis.
"Set up a plan and stick to it. It˜s always worth starting early and being consistent," she said.
The younger people are when they start saving, the less money they˜ have to contribute to build up a nest egg.
"It˜s mind-boggling. Early compounding really acts in your favor," she said.
She recommended taking advantage of tax-deferred pension plans at work, as well as any employer matches.
"If I put a dollar into a plan and it˜s tax-deferred, it˜s equivalent to putting $1.30 in on an after-tax basis," she said.
But if an employer matches that $1 contribution, then the individual gets $2 and receives a 100 percent return on the investment.
"Many people don˜t take advantage of employer matches," she said.
Individuals who don˜t have a tax-deferred plan at work can take advantage of IRAs and contribute for a nonworking spouse, too, she said.
Home ownership also can contribute to a nest egg in retirement. Interest is the largest component in paying off a home mortgage in the early years.
"You˜re getting a good deal with a house and deductible interest. You can do it for a second home, too, as long as you live in it a portion of the time," she said.
She advised checking with a tax attorney or certified public accountant on taking a deduction on a second home.
"A house is part of the overall portfolio," she said. "Don˜t look at it as being your only investment for retirement. You˜ need other assets, too."
People can save small amounts of money at a time — as little as $25 a month — to achieve their goals, said Randee Cook, a certified financial planner in Greeley.
"Through bank drafts, time and compounding would be on their side," she said. "They need to pay themselves first and treat their savings like a bill. Then it can happen."
Cook said she advises her clients to plan for long-term goals such as retirement, as well as short-term and intermediate goals.
An intermediate goal might be accumulating enough funds to cover a child˜s college tuition while short-term goals might cover vacations, new cars or moving up into a more-expensive home.
"You look at their spending habits and what˜s important to them," she said. "They have some bigger-purchase items they want, a bigger house or a special college for a child."
One way to put aside a nest egg for the later years is to build up home equity, she said.
Another is to contribute to pre-tax savings plans at work.
"They need to take advantage of company plans because if they can save pre-tax, that˜s an excellent way to have Uncle Sam additionally contribute," she said.