Better Saving for Retirement

Last week the Congressional Budget Office predicted that Social Security will pay out more than it takes in this year. It was predicted to happen, but not for several more years. With Social Security on increasingly shaky ground, it's now more important than ever to save for retirement on your own. Stephanie AuWerter, Contributing Editor for SmartMoney.com, offers some tips on how to get the most from saving.

First, start now! The easiest path is to start saving for retirement in your 20s. If you start saving $5,000 a year when you're age 25, by the time you turn 65 you will have a comfy $1.3 million to live off, assuming you earn an 8% return. However, if you start at age 45, and you set aside that same amount you will have less than $230,000. You can catch up later in life, but it takes a whole lot more work.

Also, make the most of your 401(k). For the vast majority of people, this is the cornerstone of their retirement plan. Always contribute at least what is required to get the company match, but try to put away a lot more than that. Boost up your contribution level today. Shoot for at least a 10% contribution. Since this money is coming out of your salary pre-tax, you won't even feel it, and you sure will appreciate it during retirement.

And don't forget about the Roth IRA. The beauty of these accounts is that the money comes out tax-free. Let's face it: tax rates are almost surely going up, so this is a great deal. There are income limits on who can contribute, but starting this year, anyone can rollover money into a Roth from a traditional IRA. So everyone should get in as much money as you can.

It's also a good idea to get your house in order, literally. If you are nearing retirement age, try to get that mortgage paid off. This may sound like an old-fashioned notion, but having a paid-off home will give you enormous flexibility in retirement. It eases your cash flow, and provides a big cash cushion. You can live there, sell it, or if needed, tap the equity in the house using reverse mortgage.

And finally, have a long-life plan. The biggest threat to a retirement plan is living to a ripe old age. So plan for it. Figure out how you'd pay for long-term care. One option is insurance that covers this. You also should consider something called an immediate annuity. This is a product that offers payments for the rest of your life. Living a long time is a great thing, but you don't want to be caught in the cold.

For more tips on saving for retirement and other personal finance topics, click here.
by Stephanie AuWerter and Jenn Eaker