NEW YORK – If you’re having some regrets about how you’ve been handling your financial life, take heart. You can resolve to make a fresh start in the new year.
Financial experts say one of the easiest steps you can take to get yourself on the right track in 2005 is to raise your contribution to your retirement plan. Even if you can’t afford to set aside the maximum amount, you should increase it gradually – perhaps by 1 percent a year – and aim to max it out over time.
“Whenever you get a salary bump, whether it’s in the form of a raise or a promotion or a new job, whatever, don’t take it all home,” said Don Cassidy, senior research analyst with fund tracker Lipper Inc. “Pretend you got less, and set it aside. That’s the least painful way of getting from wherever you are up to a higher percentage.”
If you have access to an employer-sponsored plan, and your company will match some percentage of what you contribute, you should at least be investing up to that level. If you don’t, “you’re leaving free money on the table,” Cassidy said.
Limiting your current spending might seem like a sacrifice, but it’s probably worth it; study after study has found the majority of Americans aren’t saving enough for retirement. It’s even more important for younger workers to set money aside because the Social Security Administration projects a massive shortfall in funding over the next several decades.
“I wish we could turn peoples’ minds around on this issue, to get them thinking rather than ‘something is being taken away from me,’ to ‘the government is giving me a great return on my dollar,’” said Paula Chauncey, a managing partner with Boston-based wealth manager Etre LLC.
The money you pour into a 401(k) or an individual retirement account is tax deductible and grows over time tax-free. The way Chauncey sees it, if you’re in the highest tax bracket, that’s like having the government give you 35 cents for each dollar you invest.
“For every person who is out there wracking their brains trying to come up with a way to get a salary hike, this is an automatic raise,” she said. “Whether you’re 20-something or a 50-something, the power of compounding interest, particularly on a tax-deferred basis, is so strong you can’t beat it with any investment alternative.”
Even if you failed to follow through on last year’s resolution to set more money aside for retirement, there’s still time to make good on your promise. You can make 2004 IRA contributions until April 15. The maximum amount you can contribute is $3,000, plus $500 if you’re over 50. Even if you only have a couple of hundred dollars to set aside, it’s still worth doing. No matter what amount you invest, it will grow tax-free until you become eligible to withdraw without penalties at age 591/2 .
The best part is there’s plenty of time to save the maximum contribution for 2005, which has been stretched to $4,000, plus the additional $500 catch-up for people over 50.
Once you’ve taken care of your retirement basics, resolve to educate yourself as much as possible about your overall financial strategy. Regardless of whether you’ve hired an adviser, it’s wise to “become your own portfolio manager,” Cassidy said.
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