Does it really Pay to Save for Retirement – Yes

I work in the field of retirement finances, and I’ve read a few of the Helium articles on this subject. I’m going to get a little technical about saving for retirement, but first let me address the debate itself-YES. It pays to save for retirement. You work your entire life to earn money so you can survive, even thrive, and so you can provide for your loved ones. If all goes to plan, you steadily increase the rate at which you are paid until it is time to stop working and enjoy your retirement. What happens then? Your regular paycheck stops, Social Security payments start, and if you’re extremely lucky, you get a Defined Benefit pension (an old-fashioned pension in which you receive a series of fixed payments for the rest of your life). But DB pensions are going the way of the dodo bird, and anyone under the age of 50 is unlikely to have one to fall back on.

I don’t think people understand how critical it is that you have enough money when you retire. The absence of the weekly or bi-weekly paycheck could be more traumatic than you believe-Social Security can’t begin to make it up. If you don’t have a pension, the thought of trying to survive on Social Security payments, even if they will be around when it’s time for you to give up working, strikes fear into my heart, and so should it be with you. There’s healthcare to think about-Medicare can’t hope to cover you entirely. You’ll need supplemental insurance to cover the shortfall. There’s the potential for nursing home stays-very expensive if you don’t want to stay in a state-run facility. There’s recreation-after all, you’re not going to be working, so what will you do with your time? There are only so many crossword puzzles or sudokus you can do in a day. And there’s an inheritance for your loved ones. All of those things take money. You need to make up the difference yourself, and the only way to do that short of winning the lottery is to save while you’re working. Fortunately, the government has given us several ways to save and pay less in taxes while we’re doing it. More on that in a moment.

But first let’s take it as a given. Saving for retirement is necessary. Crucial. Vital. Not doing it is shortsighted and dangerous. But how can we do it without giving up our lifestyles while we’re working?

I’ll focus on two account types that you can use to do that relatively painlessly.

If you’re working, a 401(k) is essential. There shouldn’t be a debate about that. For one thing, the savings are automatic. The money comes right out of your paycheck (in most cases) and you probably won’t miss it. For another, you don’t pay taxes on those contributions when you make them. So you’re saving on taxes now as you save for retirement later. And best of all, most employers match your contributions up to a certain percentage, so if you contribute, you’re getting free money in your account. 401(k) plans have other provisions as well, and many allow you to take loans from the proceeds or withdraw funds under certain conditions. Of course, if you withdraw funds before age 59 1/2, you’ll have to pay taxes on your withdrawal, and in most cases, a 10% penalty on top of that. Over that age, and you pay just ordinary income taxes. Conventional wisdom says that once you retire, you’ll be in a lower tax bracket (because of lower income), and therefore will owe less in taxes than you would when you were working. If you’re not contributing to your 401(k) where you work, start now. Check with your benefits office to find out how.

The second account type is an IRA. It is similar to a 401(k) (it’s tax-deferred, meaning you don’t pay taxes on contributions or the growth of the account as long as you don’t withdraw the money) except that it’s self directed. You have to physically make the contribution every year, and you often have a lot more investment choices from which to select. Most banks, brokerage houses, and large investment firms (like Vanguard, Fidelity, ING, etc., etc.) offer IRAs at a very low cost. Any of these companies will be more than happy to tell you what they offer.

If you don’t have an IRA, look into it. You can contribute up to $5,000 per year to an IRA (as of 2008), and even more if you’re 55 or older. And guess what? You don’t pay taxes on those contributions when you make them, so again, you’ll pay less in income taxes each year you contribute. And it bears repeating that you only pay taxes on the money when you take it out, usually in retirement.

It pays to save for retirement, and it pays to inform yourself. If you value your happiness, you will take my advice and do both.