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Cents and Sensibility

Guy Steele

Saturday, September 11, 2004


Saving for retirement
carries several side benefits


IF you're just starting out in the working world, you may think it's too soon to start planning for retirement. It's not. As you build your retirement savings, time is your greatest ally. Consequently you'll want to take immediate advantage of the retirement plans that may be available to you.

Start with your 401(k). Many businesses offer a 401(k) plan to their employees. If you work for a state or local government, you may have a 457(b) plan; if you're employed by a school or non-profit agency, you might participate in a 403(b) plan. All these plans offer some common benefits:

>> Tax deferred earnings. Your earnings grow on a tax-deferred basis, so your money will accumulate faster than it would if it were placed in an investment on which you paid taxes every year.

>> Pre-tax contributions. Because you contribute pre-tax dollars to your 401(k) or other plan, you'll lower your adjusted gross income and your annual tax bill.

>> Automatic payroll deductions. With all your other expenses, you might find it bard to save for retirement. But your employer deducts money for your 401(k) or other plan from your paycheck, so you never miss a chance to help build your savings.

>> Choice of investments. Most retirement plans have several investment options, so you can spread your dollars among stocks, bonds and other vehicles.

Clearly, your 401(k) or other tax-advantaged retirement plan offers you an array of key benefits -- so contribute as much as you can afford.

In 2004, you can put in up to $13,000; this limit rises by $1 000 a year until it reaches $15,000 in 2006, after which it may be adjusted annually for inflation.

If you're lucky, your employer may even match part of your contributions; if you don't put in at least enough to earn the match, you are literally leaving money "on the table."

Next stop: Your IRA

Even if you haven't "maxed out" on your 401(k) or other employer sponsored plan, you may want to invest in another retirement savings vehicle: an Individual Retirement Account. A "traditional" IRA offers tax-deferred earnings growth, while Roth IRA earnings grow totally tax-free, provided you meet certain conditions And you can fund either type of IRA with virtually any type of investment you choose: stocks, bonds, government securities, certificates of deposit, etc. Consequently, an IRA can help you go beyond your 401(k) to diversify your retirement portfolio.

In 2004, you can put in up to $3,000 to a traditional or Roth IRA; this limit is scheduled to increase to $5,000 by 2008. While these contribution limits are much lower than those of your 401(k), you may still find it difficult to fully fund your IRA -- for the simple reason that you won't have the "forced discipline" that comes from an employer deducting money from your paycheck. That's why you may want to set up a bank authorization, under which money is automatically moved each month from your checking account to your IRA.

Don't delay; by investing as much as you can in your 401(k) and IRA right from the beginning of your working years, you can go a long way toward achieving the resources you'll need for a comfortable retirement. So start putting money away as soon as you can -- you'll be making a smart move.




See the Columnists section for some past articles.

Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688


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