Retirement 101
STUDENT WRITES:
MONEY PROF responds:
Email me again to make this clearer Do you mean it matched 25% of whatever you contribute?? If so up to what amount??? For example 25% up to 5% of salary??? Is there a waiting period to get the match??? Etc.
YES, enroll today. Would start with 5% of salary, with a firm goal to raise to 7% by Sept., and 10% by Feb 2006. Important not a BS "wish", a firm goal of 10% within a year. As that's what needed to be in good shape at age 60.
Bear in mind its before tax dollars, so the top of your tax bracket is saved. For example if you put in $25 per week, it will only cost you about $15 out of pocket as you'll defer $10 in taxes.
Read this again as I've had trouble getting this part through to people in the past: If you don't put in the $25 you DON'T keep the $25, you only keep $15. Repeat, you only have $15 in your hand.
So you're out $15 at this point. Now you deposit $25, and lets say the company puts in $6. So your $15 turns into $31 to invest. YES, $31.
With a 401K you will have to pay tax when you withdraw the money at retirement, but you wouldn't do that until you weren't working so your tax bracket would be very low.
If you take money out before 59 yrs old, not only do you pay income tax which will be high as it is added on top of your salary income, but also a 10% penalty.
If you understand "compounding" you know that its almost impossible to save the amount that would be needed if starting with zero at age 47. Could never afford the weekly deposits.
If you don't understand compounding be sure to learn the basics this week. I don't have time is a BS excuse, you don't find the time, you make the time.
Here is a start: its called the "rule of 72". You divide the interest rate, or the % return, into 72 = the years it takes your money to double. For example if you earn 8% on your investment, it would take 9 years to double your money. So where 90% of the people go wrong is they say why worry about this now, I'll save when I'm 50 yrs old. It doesn't work.
So if your in your 20's you have a lot of doubles. If 50 a lot less.
Now actually do an example: make the math easy, say you have $1,000 at your age. What would you have roughly at age 60 if you earn 8% and only counted the $1,000??? Now do it again, but start at say 45.
Email me the answer.
"The company matches a %- last year 25, the two before were 10.
Should I go ahead and enroll? Maybe at 3-5%? I have options as to where I
want to invest."
MONEY PROF responds:
Email me again to make this clearer Do you mean it matched 25% of whatever you contribute?? If so up to what amount??? For example 25% up to 5% of salary??? Is there a waiting period to get the match??? Etc.
YES, enroll today. Would start with 5% of salary, with a firm goal to raise to 7% by Sept., and 10% by Feb 2006. Important not a BS "wish", a firm goal of 10% within a year. As that's what needed to be in good shape at age 60.
Bear in mind its before tax dollars, so the top of your tax bracket is saved. For example if you put in $25 per week, it will only cost you about $15 out of pocket as you'll defer $10 in taxes.
Read this again as I've had trouble getting this part through to people in the past: If you don't put in the $25 you DON'T keep the $25, you only keep $15. Repeat, you only have $15 in your hand.
So you're out $15 at this point. Now you deposit $25, and lets say the company puts in $6. So your $15 turns into $31 to invest. YES, $31.
With a 401K you will have to pay tax when you withdraw the money at retirement, but you wouldn't do that until you weren't working so your tax bracket would be very low.
If you take money out before 59 yrs old, not only do you pay income tax which will be high as it is added on top of your salary income, but also a 10% penalty.
If you understand "compounding" you know that its almost impossible to save the amount that would be needed if starting with zero at age 47. Could never afford the weekly deposits.
If you don't understand compounding be sure to learn the basics this week. I don't have time is a BS excuse, you don't find the time, you make the time.
Here is a start: its called the "rule of 72". You divide the interest rate, or the % return, into 72 = the years it takes your money to double. For example if you earn 8% on your investment, it would take 9 years to double your money. So where 90% of the people go wrong is they say why worry about this now, I'll save when I'm 50 yrs old. It doesn't work.
So if your in your 20's you have a lot of doubles. If 50 a lot less.
Now actually do an example: make the math easy, say you have $1,000 at your age. What would you have roughly at age 60 if you earn 8% and only counted the $1,000??? Now do it again, but start at say 45.
Email me the answer.
posted by MoneyProf at Thursday, February 17, 2005
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