STEP THREE: PLAN TO MEET YOUR GOALS
Learn even more about this topic with the Encyclopedia of Personal Finance™
Perhaps you're one of the lucky few whose current retirement
resources are greater than their anticipated needs. Good for you! You might
consider shifting some of those resources to your current needs, or making some
more adventurous investment decisions.
For the rest of us, the task will be planning to make up the
shortfall between what we'll have and what we'll need. You might start by
deciding to decrease your needs: retire later, live on less, do without the
Or you might decide to act now to increase your income when you
retire. Establish a personal budget that lets you set aside some money from your
current expenses and invest it in your future. There are lots of good reasons
for doing so.
? Tax savings. The US Government has
established a number of ways to save and invest for your retirement that allow
you to protect your income and earnings from taxes. The tax-deferred savings
program [401(k) or 403(b)] your employer may offer is an example: You can invest
your contributions in a variety of investment choices, and both your
contributions and the earnings on your investments are tax-free until you take
them out. An IRA and tax-deferred annuities are other examples of retirement
investments that reduce the tax bite.
? The miracle of compounding. When you invest
your funds, your money earns money, and then that money earns money, and
then—well, you get the idea. As an example, $1,000 invested pre-tax in a
tax-deferred savings plan that pays a relatively modest 8 percent interest rate
will grow to a value of over $21,000 in 40 years. The sooner you start building
for retirement, the less you'll have to take out of your current spending, and
the more you will have to live on later.
You now have a fairly good idea of what needs to be done.