Monday, June 2, 2008

Retirement Planning: At 30

Retirement planning at age 30 puts you in a unique position. You would have done better had you started saving years ago. And yet, you are still at an age where you can capture many of the same opportunities that you may have missed.

At age thirty, life begins to seem like a game of rock-paper-scissors. You are familiar with the game. Competitors face off against each other, pump their arms and reveal a fist (rock), an outstretched hand (paper) or two fingers (scissors). Best of three wins the contest.

The game is so simple; it has been used to decide court cases and even disputes over works of art. They played it recently on the television show Survivor to determine who would go to Exile Island. Some scientists even suggest that game may govern the equilibrium of the universe.

In your thirties, the wrong move could leave you facing financial set back, one that could take years to unravel. If you are just beginning your retirement journey, you will find yourself in one of three financial positions. You will either have no debt with no savings, no savings and debt, or a family, house, car, and everything that goes along with life at this stage in the game. (Ironically, even those that have started to save, possibly through their work, still fall more or less into one of the three categories.

While the situation is far from dire, you do need to get things together quickly.

If you have no debt and no savings, there are some simple solutions to your retirement plan. Begin to build an emergency account - $25 a week to a money market account with limited check writing abilities is often enough to get started.

    A money market account generally pays a higher interest rate than regular passbook savings and checking. Access to the account is often limited to a few checks a year. This limited access but immediate availability make these accounts ideal for creating an emergency savings account

Next, if you haven't done so already, look into beginning to save for retirement with a tax deferred retirement account.

Using your employer's retirement plan, the most common being a 401(k) account (public employees often use a 403(b) account in the same way), you can begin building an account for your future. If your employer offers a match, lucky you.

    A match acts like an incentive to save. Offered by your employer, your contribution, up to a certain limit, is matched dollar for dollar.

You need to contribute at least that much to the account. This is free money that is put into your account with your contributions, and when invested and allowed to grow over time, will give you a sizable jump on where you need to be.

Even if your employer doesn't match your contribution, you should put away 5-10% of your pre-tax income. This money is withdrawn before the taxes are taken out and in some instances, this can actually lower your overall tax by licking you into a lower bracket. The upside to this: it may have very little effect on what you take home.

If you have no savings and debt, a much more common scenario, you can also be saved and surprisingly, without too much pain. It is obvious that you are living somewhat beyond your means. You have financed your lifestyle with money you didn't have.

The simplest way for you to get back on track is to build a spending framework. That's right: a budget.

    Budgets act like road maps. They simply give you an overview of where you are now ­ assets (income) minus liabilities (what you owe and to whom) equals how much you have left to spend or save in a given period of time, usually over the course of a month.

Budgets can be like diets and New Year's resolutions. You start out with the best intentions but the changes you have promised yourself to make are often too drastic to achieve. But unlike diets and New Year's resolutions, they are incredibly important for two reasons.

It allows you to see where you are financially. Your money is not working for you if you are servicing debt. Debt comes with a cost and each time you pay interest on debt, you are paying for the use of that money. This exacts a toll on your savings.

Budgets also give you some idea of what it takes to get through the month ­ real dollars. At this stage of life, it is no sin to live paycheck-to-paycheck. We have all done it. Many of us still do.

Paying off your credit cards is easier than you might think. I have developed a simple way called the sliding scale. Here's how it works.

If you have three cards ­ this about average ­ list the minimum payments of each on a sheet of paper. For the sake of example, let's assume that these minimums are $25, $35, and $50. Your plan of attack using the sliding scale is simple. Pay double the amount due on the lowest minimum until that card's balance is paid off.

    The payment schedule on the sliding scale would change from $25, $35 and $50 to $50 ($25 x 2), $35 and $50 for a total of $135

This increases your monthly credit card payments ­ something you should make on time and without fail every month ­ from $110 to $135.

Once that card is paid off, put it away for extreme emergencies and roll the $50 payment over to the next minimum. You are still paying the same amount but with one card paid off and the other card getting an $85 payment instead of $35 ($50 from the first plus $35 from the second), you are well on your way to satisfying that card's outstanding balance.

When that card is paid-off, put it away as well. Now, you are paying $135 to the card with the $50 minimum payment. Without taking too much from your budget (just $25 more a month), you have begun to tackle your credit card debt in a meaningful way.

At thirty, however, you might also have a car you have financed, college bills and possibly even a mortgage. A budget will give you the opportunity to see how much money goes where.

If you fall into the last category: family, a house, a car (possibly two) and no savings, it is time to change that. Now it becomes vitally important to begin to use your employer's retirement plan (see the thirty-year old with no savings and no debt), work on living within your means (see the thirty-year old with no savings and debt), and enjoy yourself.

The attitude you bring to life is more important at this stage than ever. You can see the future and have made tentative plans on how you will get there. You need to look forward to forty, and fifty, and even sixty as something worth achieving. Making the right retirement moves now will allow you to move forward with no regrets.

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