As we approach the end of 2008, now is the time to start thinking about your retirement contributions.  Most people are aware of the rules for corporate 401(k)s, Traditional IRAs and Roth IRAs, but here are four retirement plan options that you might not know.

1. Individual 401(k)
Sometimes known as the Individual(k) or the Self Employed 401(k), the Individual 401(k) was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  It is designed for owner-only (or owner and spouse) small businesses, and allows them to establish an Individual 401k plan, similar to those run by large companies.

Compared to other self employed retirement plans, the Individual 401(k) allows for greater contributions, and thus greater tax deductions.  In 2008 the contribution limits for an Individual 401(k) is $46,000, or $51,000 if the owner is over age 50.  This is made up of a maximum salary deferral of $15,500 and profit sharing contribution of up to 25% of compensation. In addition, like a corporate 401(k), the Individual 401(k) allows for tax free loans of up to 50% of the total value, to a maximum loan of $50,000.

2.  SEP IRA
The Simplified Employer Pension (or SEP) plan is another retirement savings vehicle for small business owners and the self employed.

The annual contribution limit is 25% of W-2 compensation, to a maximum of $46,000 for 2008.  Like a Traditional IRA, monies invested in a SEP IRA are tax deductible and earnings are tax deferred.  To make the maximum contribution into your SEP IRA as a self employed or small business owner, you must declare at least $230,000 in earned income.

3.  Simple IRA
A Simple IRA is an employer sponsored plan for small businesses with up to 100 employees.   It consists of two parts: an optional employee salary deferral and a mandatory employer match.

Like a 401(k), employees can defer up to 100% of their compensation, to a maximum of $10,500.  This amount is tax deductible for the employee.  Employers are required to match the employee’s contribution on a dollar-for-dollar basis, up to 3% of the employee’s compensation.

4.  Spousal IRA
There are two flavors of Spousal IRA: nonworking spouses, and both working spouses.

A nonworking spouse can make a tax-deductible 2008 IRA contribution of up to $5,000, as long as the couple files jointly on their tax return, and the working spouse has enough earned income to cover the contribution.  There are income limits and rules surrounding the working partner’s coverage in an employer’s retirement plan (such as a 401k) which phase out the deductibility of this contribution, so always check with your tax specialist before making any contribution.

If both spouses work, and neither participates in a qualified retirement plan at their job, both can make deductible IRA contributions of up to $5,000 as long as there is enough earned income between them to match the amount of the contribution.  For example, a wife works a regular 9-5 job (which does not offer a retirement plan) and the husband has a small part time business at home.  Her income is $65,000 and his is $4,500.  They can both make deductible IRA contributions of $5,000 (for a total of $10,000) because combined their income is over $10,000.

Spousal IRA contributions can be made into either a Roth (non-deductible) IRA or a Traditional (deductible) IRA.

There are pages and pages of rules and regulations surrounding all of these options, so please talk to your financial advisor and tax professional first.

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Many times young adults just entering the workforce aren’t getting paid as much as they would have hoped for. For this reason some are not looking into their company’s 401(k) offerings because they don’t want to start saving money that they shouldn’t touch for about 40 years (at least). When you are young you often get caught up in the “here and now” and forget about the future. However, preparing yourself for your future is one of the best ways to start off your career.

According to Schwab Center for Investment Research, young employees in their early 20’s should be saving about 10% - 15% of their paycheck into their 401(k) if they want to be prepared for the future. However, the average rate of savings among this generation is only at about 6% (not nearly enough).

Here some top reasons that you should start a 401(k) ASAP:

1. Tax Benefits

The money that you are putting towards your 401(k) comes out before you are charged for taxes. This way although you cannot touch the money (or shouldn’t touch the money) until you are ready to retire, your income is getting taxed less than it would if you were not putting money towards your 401(k).

2. Company Matching Contributions

If you find yourself in a bind for money right now, at the very least try to contribute as much money as you can so that you can benefit from your company matching contributions (remember: every penny counts!). Many companies give their employees a match on their retirement savings. This means that if you contribute $1 towards your 401(k) often times your company will match you 50 cents per dollar up to a certain percent of your contribution (usually 3%-5%). This is money that you are getting just for investing in a 401(k) and carries with it no risk.

3. Preparing For Your Future

This is one of the biggest reasons that a 401(k) is important. When you are in your 20’s, retirement seems light years away. However, time goes by so quickly that it will be here before you realize how much time has gone by. Putting off investing in your 401(k) won’t benefit you in the long run. With the market currently the way it is, people are afraid to invest in anything, but eventually things have to turn around and you will be happy that you were saving while you were young.

4. Target-Date Funds

Under this, your 401(k) automatically maintains a diversified portfolio of stocks and bonds. For many employees who do not completely understand the market and are too afraid to take big risks and lose their money, a target-date fund may be useful. However, our partners at MainStreet.com suggest that target-date funds are not always as easy as they appear and might still involve some risk. Check out the full article here to learn more!

Don’t let not understanding your 401(k) be a reason to not invest in this saving initiative. Ask your company for help in further understanding what your 401(k) has to offer and do your research online as well. If you do not take the initiative to understand your 401(k) and your future you may find that you are in a bind when your retirement time arrives. Even if you feel too young to start saving, it is always better to be safe than sorry. Knowing that you started to put money towards your future when you were young will be a big weight off your shoulders as the time approaches for you to retire.

Photo: Michael Connors

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With the economy currently in a recession, it is not uncommon to hear about older generations that are already in retirement losing their homes or not having enough money to live off of. It is extremely sad and heart wrenching to hear these stories but there may be some things that you can do to prevent these unfortunate occurrences happening to you.

Even today, women are more affected by poverty in old age than men. Why? – Women live about 5 years longer than men. Although this may not seem like that long, it adds up quickly when money is involved. Not only do women live longer, but they are also in retirement for longer. According to MSN.com, women retiring at the age of 65 have about another 20 years of life where men only have about 17 years.

So, what can you do to prevent yourself from falling below the poverty line in retirement? These four easy suggestions may be a good starting point.

1. Don’t Count Solely on Social Security – We have seen recently how much money people can lose when the economy takes a sudden turn for the worse. Make sure you are taking full advantage of a 401(k) that may be offered by your company and also set up a separate retirement account for yourself. Social security is too financially unstable to depend only on that. You can include your social security in some of your calculations, but make sure to consider that this may not be 100% guaranteed in the end.

2. Educate Yourself – You want to be as knowledgeable about your own finances as you can get. This way when you find yourself in a tight spot you can find ways to work your way through it until things look up. According to an article on MainStreet.com, women are often times overwhelmed by financial information. Make sure you are taking the first step in the right direction. If need be, ask for help!…You can always find great information in our Geezeo Blog or Groups such as Ask the Expert: Farnoosh Torabi and Penny Pinching To Early Retirement where people might be able to answer your questions and offer advice (for free!!).

3. Set Up Your Health Coverage – Make sure you are all set with your health insurance and possibly look into long term care before you enter retirement. Medical costs add up quickly and you don’t want to be caught without coverage. If you have a spouse make sure that you have this discussion with one another to make sure you are both covered. Don’t go without! Although at the beginning of retirement you might think you are okay, as time goes on little things can start happening and the costs can add up. Better safe than sorry!

4. Work For As Long As Possible – I know that many people like to take the time off to be with their children and grandchildren, but the fact of the matter is, the longer you work the more money you can put towards your 401(k) which will definitely help you in the long run. Even if you can’t stay with your full-time job, work part-time at something you think you might enjoy. Although this may not contribute to your 401(k) it will still bring a little bit of income into the house and as we all know – every little bit counts!

The statistics for women in retirement are grim. Women are 71% more likely to live below the poverty line than men in retirement. Take these suggestions into consideration and hopefully we can lower than percentage and fewer women will be affected by poverty in their “golden years.”

Photo: Jane M Sawyer

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Roberta McCain is financially independent at 96. Will you be?

There are many things that we probably shouldn’t do with regards to our money.  For instance, spending money without keeping track, not having a budget, or splurging with credit cards we can’t afford  to pay off are all things that could cause problems financially.  But what may be some of the not so obvious ones that can easily burn through our money and possibly even make us feel guilty afterwards?  No, it’s not that occasional Starbucks you splurge on and not tell your significant other about.  (Although, that may be an area that can still make you feel a bit guilty.)

No, these are things that you may pay for every month, and not even think twice about them.  Or maybe you do, but it’s not until the middle of next month.  Then you realize that they weren’t really necessary to begin with, and wonder why you paid for them.  These may also be things that cause you to not do what you should be doing.

Jay White, founder of Dumb Little Man, wrote about such financial expenditures that often times “fly under the radar.”

The first one he mentioned was Subscriptions.  This could be magazines you get because you might find the time to read them at some point.  Or HBO Channels that you may think you need in order to see one or two of your favorite shows.  Jay asks a really good question here:

“Are you still as excited about the purchase as you were on the day you signed up?”

He goes on to say:

“If not, ask whether you really need the item in your life or if you are willing to continue paying the monthly or annual fee. Remember, this is more than magazines and cable TV. Consider gym memberships, website forum memberships, cell phone data plans, the Wifi card subscription you don’t need at Starbucks anymore, etc.”

So it’s time to sit down and really calculate all of these subscription costs and see if you can find better ways to use the money.  Remember too, when it comes to magazines, if you still want to occasionally read them, you can most likely find them online now.

Jay continues on to mention two things that many people struggle with.  The first one is procrastination.  You don’t want to put off doing today what you think you will have time to do tomorrow (but most likely won’t be able to fully complete).  Jay suggests setting up an “automatic withdrawal that goes into a savings account not attached to your checking account. If your income level allows for it, put some cash into a Roth IRA, etc.”

The other thing Jay mentions is the act of making assumptions.  “You have to plan your finances in a way that will all but guarantee your needs are met. If you do get a windfall or if Social Security exists in five years, you need to treat that as a bonus. You can NOT rely on anything that you don’t personally control.”  Websters dictionary links assumptions with arrogance.  Therefore, if you do not plan for your future on your own, one could almost claim you to be a bit arrogant, or that you feel like you are superior to others, and deserve to be taken care of in the future no matter what you did or did not do prior.  However, that is why there are options in place now that allow you to save for later on down the road.

Don’t assume tho that it is too late to start.  In fact, if you want some advice on trying to get started with your retirement savings, check out one of our many groups, such as Investing For Our Future.

Jay gives many more good examples of areas we could improve on that goes deeper than just spending less than you make, or only using credit cards when you can pay them off.  Check them out and see if there are any areas in which you could improve and possibly save money now and for the future.

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There is one big secret to personal finance: pay yourself first.

People define this practice in several ways. Some say to set aside one hour’s worth a wages every work day. Others simplify it as taking 10% (or more) off the top of your paycheck. Every paycheck. Forever.

So what if you’re like many people and are getting a late start? The simple truth is that to build a solid financial foundation you must adhere to this principle. So how can you jump-start your “pay myself first” account? Here are four steps:

1. Set up a 401(k), 403(b) or IRA. You can get help through your Human Resources department, your bank, or by doing your own research online. I personally think a good account for beginners is ING Direct.

2 - Put at least two hours of wages into a tax-deferred account like your 401(k) - every day. This is perfectly legal, and smart, too. Uncle Sam is your best investing partner. Sound impossible? Start with putting just 1% in every month and increasing this by 1% every month. In two years you’ll be saving 25% of your gross income.

3. Make it automatic!! This is key. If you don’t see it, you won’t spend it. Set up your retirement account so that it automatically pulls money every payday.

4. Max it out. Make it your number one priority to max out your account with the legal limit of contributions you’re allowed. Do this every year. Yes, this is ambitious. But if you’re starting late you must commit to big action. This is your future we’re talking about!

A tax-deferred account is just one part of the “pay yourself first” plan. To really rev it up, you should also maximize your other investments and savings. They all work together. And if you’re getting a late start it’s important than ever to act.

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With the election edging closer and both sides getting more vocal it is easy to overlook some fundamental ways that Uncle Sam is your ultimate investing partner.

Yes, that same Uncle Sam to whom you pay taxes. Think he’s never very generous? Think again.

Here are three reasons why Uncle Sam is actually a pretty good investing partner:

1. Sam trims your tax bite if you hold stocks for a long time. Why? You get rich, he’s gets rich. Uncle Sam gives you a huge tax break if you hold investments for twelve months or more. Let’s say you’re in the top tax bracket (39.6%). The tax savings of holding investments for a year or more are 100 percent (20 percent long-term capital gains tax versus 39.6% tax on short-term gains).

Example: Let’s say your portfolio has a profit of $5,000 after six months. If you sell (and are in the top tax bracket), Uncle Same gets $2,000 — roughly 40% of your profit. You keep $3,000.

But let’s say you hold onto your stock for a full year. And let’s assume that instead of growing in value it actually loses 20% of its value! Now you’ve only made a $4,000 profit. After Uncle Sam’s cut ($4,000 x 80%) you have $3,200. Hello? You’ve got $200 more than if you sold it earlier!

2. Uncle Sam created the 401(k). Why? Because he’d rather you save for your golden years than have to foot the bill himself. Uncle Sam helps you by insisting that every dollar put into your 401(k) lowers your tax bill. And, every dollar you invest grows tax deferred. Let’s assume Social Security won’t be around when you need it. Take care of your 401(k) so it will take care of you!

3. Sam’s cousin, Uncle Ira. Why? Uncle Sam is pretty sure Social Security will be history. In addition to your 401(k), everyone would be wise to set up an Individual Retirement Account, or IRA. They come in two flavors (Traditional or Roth). Uncle Sam gives you similar benefits to those outlined above in the 401(k). If you choose a Traditional IRA, every dollar invested lowers your tax bill. If you choose a Roth IRA you put in after-tax dollars but don’t pay any tax when you cash out your account! Both IRAs allow for tax-deferred growth. And that can seriously impact your investment bottom line for the better.

So, sure. Uncle Sam asks that we pay taxes to help fund all of our public infrastructure. But you gotta admit, these perks make Uncle Sam one of your best investing partners.

Note: the illustration in point 1 is from the excellent book, “Eight Steps to Seven Figures” by Charles Carlson.

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Early Start on Retirement…?

I’m not sure if I speak for the majority of people, but when I think of retirement, I think of being 70+ years old.  (Then again, I have enjoyed most, if not all, of my jobs at some point, and as long as I am happy, I don’t mind working until I am at least 70.)  However, you may not be as lucky as I am to enjoy what I do.  If this is the case, then maybe you are looking at trying to retire early.

Can this be done?  Of course!

Madison, over at My Dollar Plan, recently left the workforce in order to focus on her children, as well as enjoy her freedom.  One should not assume that she woke up one morning and decided to just quit.  This plan took time to organize.  Thanks to Madison, we have an idea of what it took to get her to this point.  She outlined 29 steps that allowed her to leave the workforce at the age of 29.  Here are a few of her thoughts:

The very first one that Madison mentions is to “Start Early.”  She started her first IRA at age 16 based on advice from her mom.  Proof that teaching your kids about money is very powerful.

She also mentions that being organized is the way to go.  It’s very important to stay on top of all of your accounts so that you know what you have, what you don’t, and what you can and need to plan for.  (Geezeo can help you by allowing you to see all of your accounts in one place.)

You should also endeavor to set some goals.  They can be big, however, just be sure to break them down into smaller, attainable sections so that you do not get overwhelmed with it.  (Again, Geezeo can help here by letting you see what your goals are and if you are making progress to achieve them.)

Madison also said that she has been frugal, but not too frugal.  There were a list of things she was just not willing to do.  And that’s OK!  However, the important thing to remember is that if you aren’t willing to compromise in one area, then it’s important to replace that with another one that is doable.  It doesn’t have to be all or nothing.

Learn from your mistakes (and the mistakes of others).  To keep tabs on yourself, keep a journal (it doesn’t have to be detailed) outlining what your goals are, how you plan on achieving those goals, and any slip ups you may have along the way.  You can also find out how others have fared  by checking out some Geezeo groups such as It’s Time To Budget and Penny Pinching to Early Retirement.

Whatever your decision, don’t look back.  Madison says: “Once you make your decision, enjoy your new life. There will be a transition period, but give it some time. I’ll be reminding myself of this in the next few weeks as I settle into my new routine.”

Congratulations Madison, on your new found freedom.  We hope that things go well for you, and we can’t wait for the updates on how you are spending your time.  If you would like to keep up-to-date with Madison’s journey through early retirement, you can check out her blog over at My Dollar Plan.

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By Jeffrey Cretan | MainStreet.com

If GOP nominee John McCain is elected president this November, his mother Roberta McCain would turn 100 during the final year of his first term. Fortunately for Mrs. McCain, who was the wife of an admiral and heiress to an oil fortune, she’s financially secure as she makes this push towards her centennial. But not everyone aging gracefully into their late golden years has those financial cushions to rely on.

For those who reach the retirement age of 65, consider how times have changed from 1935 when Social Security was enacted. In 1935, the life expectancy for a 65 year old was 12.5 years, according to the National Center for Health Care Statistics. Today it’s 18 years. These extra years, while welcome and celebrated, can cause a financial burden on the non-Roberta McCain’s of the world. “One of the problems we see is that people are literally outliving their money,” says Charles Failla, a certified financial planner at Sovereign Financial Group.

Here’s how to make your money last as long as you do. Whether retirement is three weeks away or thirty years away, the first step is to recognize your money might have to last into your nineties and beyond, and to plan accordingly. For a lot of people, this step comes too late. “When clients come to me 28 years away, that’s retirement planning,” says Failla. “When they come a few years away, it’s crisis management.”

The equation for a solid retirement is simple. Evaluate your goals and your resources, and then add up income, projected income and current savings. If this current calculation doesn’t project enough money for you to retire comfortably at 65, then says Failla, you have three options.

Save More, Spend Less

Whether it’s cutting back on daily expenses or making drastic lifestyle shifts, the important thing is watching the bottom line of your savings grow. Saving a couple bucks by cutting back on daily expenses like lattes or lunches out might seem like a minor change, but projected over a long time period, these add up. Those closer to retirement age might need to make larger shifts like moving to a smaller home or cutting back on lavish vacations. But don’t think of it as losing out on a trip to Paris. Think of it as gaining six months of grocery bills in ten years.

Keep Working

When Prussian ruler Otto von Bismarck invented the Social Security system in 1889, the eligibility age was 65. When President Franklin Roosevelt signed Social Security into law in the United States, this age didn’t change. And today, despite all the advances in medicine and healthcare, we still say the retirement age is 65. But we’re a long way from Prussia. “A lot of people are working well into their 70s,” says Failla. He points out that some enjoy working, but a lot are forced to stay in the workplace because they didn’t plan for retirement. According to statistics from the Social Security Administration, about 40% of an average earner’s income can be replaced by Social Security during retirement. That means if you can’t cover the other 60% with investments and other sources of income, it might not be time to quit the work force.

Rethink Retirement

A third option is to shelve that grand idea of retiring to a villa in Tuscany. If you can’t fix the finances on the front end, then you have to shift your goals on the back end. “The way I explain it to clients,” says Failla, “is that I’d love to have a ten acre waterfront property in Greenwich, Connecticut. But I don’t because I can’t afford it.”

Whichever option you choose, the most important thing is to not ignore the problem. “People do the ostrich thing,” says Failla. “They put their head in the sand and forget about it.” If you don’t want to see a financial planner, Failla suggests at least using an online calculator to find out your projected retirement income figures. “Really, you need to take the necessary steps. There’s no magic button that financial planners have to fix everything. I wish there was.”

Last week was a rocky one for the stock market. Maybe you also experienced the turmoil of asking, “what’s happening to my money?!?”. Personally speaking, my retirement account dropped almost a third from its previous high! That was enough to get me lighting candles, burning incense, and praying to the patron saint of 401(k)s.

“Saint Ralph”, I prayed, “what is happening to my money?! Here I am, trying to pay my bills, save for retirement, and have a little leftover for some holy wine. What should I do?”.

Here are the answers that came:

Do Not Panic, Child. Chances are good that the market will bounce back up. Even if you’re 45, you still have 15 years before you need to cash in your retirement account. You’ve got time.

I was happy with that answer, but concerned he thought I looked like I’m 45. Next he said:

Do Not Sell, Child. Ralph explained that by getting out now I’d lose the flip side of a down-turn, which is the bounce back up. Values may drop but that’s okay. He said, “Maybe you should consider buying more while the price is lower….”

Fine Ralph, fine. What else?

Take Care of Your Finances, Child. Ralph explained that a 401k is just a portion of proper money-management. To really maximize what you have you need to strengthen the basics: budgeting, debt management, long-term forecasting, and asset diversification. Ralph asked, “What are you doing to satisfy these aspects of your finances?”

I started making a mental list. After all, I work at Geezeo. We live and breathe personal finance! We help people with their money every day. Doesn’t that count for something?

Ralph said, “He only helps those who help themselves” — and then he pointed me to these related articles:

How Wall Street’s Washout Affects Your Retirement
What the Wall Street Crisis Means for Your Money
Wall Street’s Old Guard Regroups [photos]
10 Money Lessons From the Great Depression

What a crazy week. Everyone who either works in, or is invested in the stock market can breathe a sigh of relief that at least this week is over. As someone in the former category, I can attest to the insanity of this week on a physical and emotional (let alone financial) basis. I began this article on Monday and have made daily edits to this first paragraph. But the list that follows has been the same for me all week long. Sitting here now on Friday afternoon with the Dow back up over 350 points today alone (phew) the weekend doesn’t seem as bleak as it did say, Tuesday. However, here are five things you can do to help you ride out the storm.

1. Remember that markets are cyclical.
What goes up, must come down. And what goes down will come up again. Think back a few years when everyone you know was preaching that investing in real estate was a no-risk situation because real estate never loses its value. That kind of thinking was wrong then, and the proof is in the drop in housing values today. Home values in California alone are down 35% from last year. Will they be down forever? Nope. It’s a cycle. Buyers or any investment need to be aware of that cycle and act accordingly. You don’t know when a massive turnaround will happen, and you want to be in the market when it does.

2. Don’t fall prey to panic selling.
As Scott Rothbort points out in “Five More Ways to Handle Market Stress”: “(H)ad you bought the [S&P 500] on the day before the 1987 market crash, your cumulative return through the end of July 2007 — without dividends — would be 415%. That is even after giving up 20% on the first day after your investment.”

3. Turn off the TV.
For every expert opinion there is an opposite opinion. If you have real fears, and not enough time to watch more than one network or get your news from more than one source, it may be better to change the channel, skip the business section and focus on something else for a while.

4. Continue long term investing.
Don’t stop investing in your company’s retirement plan – especially if your employer has a matching policy. This match is “free money” – whether the underlying investment is having a good or bad year. Keep your focus on the long term.

5. Know the FDIC.
Make sure your cash reserves are FDIC insured. The FDIC guarantees the safety of checking and savings deposits in member banks, currently up to $100,000 per depositor, per bank. If you have more than $100,000 in cash you may want to consider spreading the accounts to more than one bank, or talking to an advisor about other options.

Keep your wits about you, and let’s all hope for a less interesting week next week!