When asked the basic question, “How do you see yourself retiring?” many respond they would like to live in retirement at least the same way they do now, just without the work and stress. Some go a bit further adding in travel and experiencing the world or seeing the family once they have more free time. However, in almost every case, the goal and desire doesn’t usually match the funds put away for them. As a result, the planning involved needs a lot more work on the serious to match up with the dreaming side.
Clearly those who start earlier have the advantage. Just having ten years more devoted to saving for retirement can make a big potential difference just in terms of gains and compounding on the principle saved and invested. So if a person can start putting money away early, he should do so at every chance. Even if the market takes a downturn with investments, overall those with time on their hands can not only recover but still make gains regardless. This in turn allows such investors to outpace inflation as well as taxes with significant gains built up with 20 or 30 years of saving. However, even those 10 or 15 years out can still make significant strides. They simply need to take advantage of the time available and put more away in savings to make up the difference.
IRAs and 401Ks
Where a person is eligible to use an IRA, he should. Even though a person can only deposit $5,000 a year until age 50, which adds another $1,000, the money can grow tax free, especially in a Roth IRA. Any other investment approach will be taxed, which adds another bite aside from inflation to that money’s growth. So putting money away each year for 10 to 30 years in a Roth IRA can shelter anywhere from $50,000 to $150,000 without taxes, not including the gains and interest earned tax-free. That’s a significant tax shelter for retirement planning.
401Ks and traditional IRAs work well for pre-tax monies prior to payroll withholding. While the money is still taxed, it can be sheltered until a person is much older and in a lower tax bracket. There’s no sense throwing good money away on needless taxes, especially if a company is offering a deposit match to 401k deposits. That’s free money in addition to tax deferment! Done right, a person can stuff away $55,000 a year in IRA or 401k tax shelters.
Consider a Second Income
Most people see their primary income committed to bills and living expenses. However, if time is available, a person can easily pull in a second part-time income via freelancing or a second job. This allows additional income which can be directed straight into investments and retirement saving without any liabilities. It’s one of the fastest and most powerful ways to save for retirement.
Retirement planning can be done in a number of ways, but all methods agree on one principle: save as much as possible as long as possible.
Michael is one of the leading Sydney Accounting experts and recommends that all people consult a finance professional when planning for their retirement.