Investing for retirement is essentially a three step process:
1. Develop a savings plan based on your retirement needs.
2. Contribute regularly to an IRA to maximize tax advantages.
3. Build a portfolio of diversified investments allocated among different asset classes
(stocks, bond, funds, and cash).
The savings plan should be based on how much income you will need during your retirement years. Of course, because of the tax-advantaged nature of IRA accounts, one should try to contribute as much as possible each year! For example, a 25-year old who starts with $10,000, contributes $4,000 annually, is in the 28% tax bracket, and earns an average return of 8 percent on her portfolio will have $676,869 in a taxable account. In an IRA, this account would have grown to $1,253,471 - almost double! There are IRS limits to annual contributions, however, so check with your tax advisor.
The current contribution limits are also listed on the Internal Revenue Service website: http://www.irs.gov/publications/p553/ch03.html
In order to help you determine your retirement income needs, there are excellent tools available free at Yahoo! Finance and Smartmoney.com.
Here are the links:
http://finance.yahoo.com/retirement/calculator_index
http://www.smartmoney.com/retirement/?nav=dropTab
In addition, the Iowa Public Employees Retirement System offers a comprehensive set of free retirement calculation tools, including an Asset Allocation calculator.
Here is the link to their website:
http://www.ipers.org/members/calculators/calculators_3.html
The Importance of Investing Early:
This chart illustrates the benefit of contributing the maximum amount annually to an IRA and letting your money compound continually at a growth rate of 8% until retirement.
Please note this graph is for illustrative purposes only and does not reflect real returns of actual securities. All investing involves risk including loss of your principal.
Zecco Trading is not a tax advisor and does not advise clients on tax issues. We are an online brokerage where you can trade stocks for free. Chart assumes an initial annual IRA contribution at the beginning of the first year and every year thereafter until retirement. Current retirement investing tax law increases IRA contribution limits of $4000 in 2007 to $5000 in 2008 and increases IRA contribution limits indexed to inflation rounded to the nearest $500 increment thereafter according to the Pension Protection Act of 2006. An additional IRA “catch-up” contribution commences at age 50. Inflation is assumed to be 3.6% percent annually. The only Zecco Trading fees of $30 are calculated at the beginning of each year. An annual composite portfolio return of 8% across stocks, bonds, and cash is assumed to be posted at the end of each year.
Of course, this estimate does not include the impact of taxes upon withdrawal or taxes and penalties for early withdrawals (before age 59 1/2) which are subject to additional taxes and the federal tax penalty of 10%.
Zecco Trading, Inc. is not a tax advisor. The Internal Revenue Service Code that governs IRAs is complex, and state tax laws regarding IRAs may differ as well. We recommend that you consult with a qualified tax advisor as you formulate your retirement planning needs.