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Nov 21 2011 12:00AM


I’m 40 and want to start saving better for retirement, but I’m tight on my budgeting and income. What can I do?


“I’m glad you’re beginning to think about your retirement now, even when your budget and income are tight,” said FPA member Peggy Doviak, Ph.D., CFP®. "However, before I can provide you with some retirement ideas, I would first ask if you have credit card debt. If you do, and if it’s at a high rate of interest, you might want to consider paying it off either before you fund your retirement, or at the same time. I know money grows over time, but so do interest payments. Also, do you have an emergency fund? If you don’t, you might want to create one of those, as well.

“You might consider a strategy that looks like this:

  • First, figure out how many nondiscretionary bills you have each month.
  • Second, look at your discretionary spending. This is spending that you could adjust up or down (like shopping, eating out, cell phone, cable, etc.).
  • Third, determine how much money you have to invest/pay down credit card bills each month. You may have to make some adjustments in your discretionary spending.
  • Fourth, if you have credit card debt, no emergency fund, and no retirement savings, split that amount to invest in thirds: put one-third of it against your credit card balance, one-third in a savings account (no checkbook, no ATM card), and one-third in a Roth Individual Retirement Account (Roth IRA). If you don’t have credit card debt, fund the emergency fund and the Roth until you have at least three months of expenses saved in cash that cannot lose value in the stock market. Then, you can continue to only fund the Roth.

“I am assuming you are not in a high tax bracket and that funding a Roth, which you do with after tax money, is all right. The advantage of a Roth over a traditional IRA is that if you leave the account open for five years and you’re 59 ½, all the growth of your investments is tax free. The second advantage is that you can withdraw the principle you put into a Roth without taxes and penalties.

"You said money was tight. Sometimes, it’s really scary to leave it “locked up” until you’re 59 ½. With a Roth, if you fund it with $1,000 in a year, you can withdraw that $1,000 without taxes or penalty. What you cannot touch is any growth the money earns. That would be subject to taxes and a 10 percent penalty if you withdrew it before you were 59 ½. (I’m assuming you’ve opened the account now, so the five years isn’t an issue.)

“You can fund a Roth up to $5,000 a year at your current age. If you fund a little each month, it’s not hard to create an amount that will begin to add up for you.”

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