According to Scott Below, chair and associate professor in the department of finance at East Carolina University in Greenville, North Carolina, the dollar amount you're able to save isn’t as important as the year you get started. Investing when you’re young, especially in your 20s, puts the power of compound interest on your side, allowing you to achieve balances in the millions with as little as $3,000 a year. Company retirement plans, IRAs and savings accounts can help you get into the regular habit of investing a percentage of what you earn.
With a 401(k), money from your earnings is put into savings before payroll taxes are calculated, which means you pay less income tax. The account also grows tax-free and -- in some cases -- your contributions may be matched by your employer. As a general rule, you want to invest 10 percent of your income in your company’s retirement plan. If you start early enough, 10 percent throughout your working career could well be enough to provide you with a comfortable nest egg when you retire. The inflation-adjusted limit for annual contributions to a 401(k) for tax year 2013 is $17,500. Those over 50 can contribute up to $5,500 more.
It is also advisable to look for long-term savings vehicles outside of the work place. All IRAs grow tax-free, with a Roth being more flexible than company plans, allowing you to invest it in stocks, mutual funds or lower-earning but less volatile bonds. Traditional IRAs allow for tax-deductible contributions, though income limits apply, and you may contribute until you are 70 1/2 years old. If you're married filing jointly and not working, it's possible for your working spouse to make an IRA contribution for you. Contribution limits in 2013 for people under 50 is the smaller of $5,500 or the adjustable gross income.
When deciding whether or not to buy a home as part of your retirement investment, consider rental prices in your area. As a general rule of thumb, if you are able to rent a place that meets your needs for less than what it would cost to buy and maintain a house, do it. Large debt obligations such as big homes have been known to prevent people from saving adequately. Factoring in inflation and the fluctuations of the real estate market, most homeowners can expect to at least break even on this investment.
Conventional wisdom advises having three to six months of living expenses saved for an emergency fund. Unexpected expenses such a major repairs, hospital bills or unemployment can happen to anyone at any age. Along with your retirement investments, get into the discipline of tucking away another 10 percent of your earnings into a savings account you can easily access. Once you have accumulated a large amount, it's possible to move that into higher yielding, low-risk vehicles, such as bonds or bank CDs.
Annuities are purchased from insurance companies and offer a guaranteed annual income -- either immediate or deferred -- with potential for growth, and income protection when the market declines. The payout amount you’ll receive each year varies from company to company, so if you have a large sum to invest, you will want to shop around.
- Jupiterimages/Comstock/Getty Images