Stop saving for even a few months and it
can be tough to get back into the habit, and it can be even tougher
to make up for the lost contributions. "Even when you get a
new job, it's easy to tell yourself you can't afford to
contribute right away, or to contribute much, and then you'll
really fall behind," says certified financial planner Annie
McQuilken, founder of Kintyre Financial Advisors in Lexington,
Mass.
In Pictures: Seven Retirement Mistakes Young
People Make
That's a
particular concern for women. Research shows we typically
contribute less, and later, to our plans than men do, even when
both have equal access to a company plan. One recent study by
Hewitt Associates of nearly 2 million
employees found women were contributing nearly 1% less of their
paychecks than male employees and waiting about two to four years
longer to start funding their plans--precisely the
opposite of what we need to be doing. Since we earn less
and work fewer years than men do, on average, but live longer, we
need to be saving more if we don't want to risk outliving our
money.
Of course, putting those
extra funds aside for the future can be a challenge when you're
struggling to get by in the present. Though men have lost more jobs
in this recession, women have been hit hard too. The unemployment rate among women is nearing 8%, according
to June 2009 figures released by the Bureau of Labor Statistics, with 5.2 million women 20
years and older currently out of work. Even if you're not among
them, you may be working in a contract job with no benefits or
working for yourself, situations that also require you make an
extra effort to keep up with retirement contributions.
There are aids, though, to
help you stay on track even when you don't have access to an
employer-sponsored plan.
If you've lost your job,
convert your old plan into a Rollover IRA with a direct transfer,
invest it conservatively and leave it alone. That way, if you take
another full-time job and like your new employer's 401(k) plan,
you can roll the money from your old retirement plan into
it--something you can't do if you've made additional
contributions after leaving the job, says McQuilken.
Then set up one of the
following:
--A Roth
IRA: You can open one if you're getting some
income this year, but not too much: an adjusted gross income below
$120,000, if you're single, or less than $176,000 combined with
your spouse. Though you can't deduct contributions you make
now, you won't be taxed on any money you withdraw after you
turn 59 and a half. In 2009, you can contribute up to $5,000 if
you're under 50 and $6,000 if you're older.
--A traditional
IRA: If you earn more this year than the limits listed
above, you won't be eligible to contribute to a Roth. But you
can put the same contribution amount into a traditional IRA, and
you may be able to deduct all of it from your tax bill. (If you or
your spouse participated in an employer-sponsored retirement plan
at some point this year, there are income limits that might affect how much you
can deduct.) You will have to pay taxes on the money when you
withdraw it in retirement, though. And as with the other plans
listed here, if you take money from your account before you're
59 and a half, you'll have to pay an additional 10% penalty tax
in most cases. (The IRS allows some exceptions for early withdrawals without
penalties.)
--A Solo 401(k): If you want to sock
away even more, this 401(k) plan allows you to save for retirement
both as an employer and as an employee. As the boss, you can
contribute 25% of your net income, up to $49,000. And as your own
employee, you can contribute up to $16,500 more. The downside: Not
all banks or brokerage firms offer these plans and many of those
that do charge set-up and annual fees. The plans also require more
paperwork to set up than a SEP does. But if you want to save more
for retirement, the fees and fuss may be worth it. You can also
choose between a traditional or Roth 401(k).
If you're between jobs
or struggling to start your own business, it may seem unrealistic
to contribute anything close to those limits right now. But keep in
mind that your income is likely to increase, and your contributions
along with it. Even if you're able to put just $100 a month
into your plan now, it's worth doing so. Over time, with
compound interest and investment gains, that money can grow
exponentially. But put it off, even for a little while, and you may
find yourself scrambling to catch up for years to come.
However tempting it may be
to tell yourself you can't afford to put money toward your
retirement now, if you're like most women, the reality is you
can't afford to stop contributing.
In Pictures: Seven Retirement Mistakes Young
People Make
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