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Before you can truly prepare for your future and retirement, you should be sure to pay off your credit card debt. Paying interest rates on your balances is throwing away money that you could me saving for yourself! By 2017, our Goverment will be paying out more in Social Security than it ever has, and who knows if us under 30 will even have Social Security in the future. But, why worry now, you ask? The more (or even the little bit) that you can tuck away now will make all of the difference in the future. Say, If you are 25 years old and you put $100 a month on a mutual fund retirement account, you will have over a million dollars by the time you retire! However, if you do not start until you are in your thirties, your balance can drop down until $300,000. Here a a few tips that you can follow in order to start saving for your future:
401(k):
Financial planners recomment that you save at least 10% of your income if possible. The first perk is that most companies will match your contributions to a certain percentage. THAT IS FREE MONEY! If your company has a matching program, be sure to contribute as much as possible. Also, contibutions to your 401(k) will reduce your taxable income. Your contributions come out of your paycheck pre-tax, which is huge, considering how much our government takes out to begin with. Speaking of taxes, you are not taxed on this money until you reach retirement. Be sure to mix up your various 401(k) investments - choose a mix of different stocks, bonds, or funds. For an easy selection, invest in a broad based index fund which is a secure, portfolio that is managed for you.
When you change your jobs (because, you know that you will before you retire), you can leave your 401(k) right where it is, roll into an IRA into another 401(k) or cash out. Cashing out is the worst option, where you will actually lose money in taxes that you could be saving.
IRA:
An IRA is your personal retirement account. You can easily set one up at your bank for low or no fees. If you have extra money that cannot be contributed to your 401(k), you are not empolyed, or you do not have a 401(k) plan, an IRA is a great option. In order to open an IRA, you must deposit at least $2,000, but no more than the maximum contribution (check your bank for this information). When interest is compounded, you ear interest on the principal and you also earn interest on the interest. For example, if you invest the $2,000 minumum, every year earning 5% starting at the age of 25, by the time you are 60, you will have well over $180,000. Make out your IRA investment each year,and you will have well over $300,000. Your IRA can be a mix of stocks and bonds, a Certificate of Deposit or a Money Market Account, depending on where you opened your account.
You can also open a Roth IRA. You can only make Roth contributions if you are a single taxpayer earning under $110,000 annually or if you are married making a combined uner $160,000 per year. With a Roth IRA, you will not be penalized for taking out money before retirement. Another bonus is that you pay taxes on the money when you make your contribution, which means, when you get older, they money in your account will be tax free.
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