It's not easy thinking about the future when it's tough enough just getting through the present. But one of these days your fingers will get tired of typing and you'll decide you never want to hear the word "affiliate" ever again. You'll decide, once and for all, to retire.
If you make smart decisions now, you're almost guaranteed to have a smooth retirement. But you'll be in big trouble if you think Social Security and luck will get you through to old age.
Here's a few ways to make sure your future is bright. (As always, a disclaimer: I'm not a certified financial adviser.)
Open an IRA
Your grandmother may have saved for the future by stashing some cash under her mattress, but there are more reliable ways to save nowadays. Among the best are Individual Retirement Accounts, also known as IRAs. IRAs allow you to sock away money for retirement in accounts and get special tax benefits either now or later. The government designed them to encourage people to save, so they're pretty good deals.
The traditional IRA lets you save up to $5,000 each year ($6,000 if you're 50 or older). The best part is that you get an immediate tax deduction. If you put in $5,000 in a single year, you don't need to pay tax on $5,000 of your income, which could save you hundreds of dollars.
But there's a hitch. When you retire and take money out of the traditional IRA, you'll need to pay taxes on it. Your choice: Do you want to pay taxes then or now?
For many people, it makes more sense to get the taxes out of the way now instead of waiting until retirement when you've got a big chunk of change in your IRA account. If this sounds like you, consider another kind of account known as a Roth IRA. You won't get any tax break now, but you won't need to pay a dime when you take the money out later.
Can't decide whether to pay taxes now or later? Join the club. It's a tough call to make. Ask yourself this: Do you think you'll be in a lower tax bracket when you're retired than now? Then maybe the pay-taxes-then approach is a good one.
But if you think you'll save up lots of money and still be in a high tax bracket when you're ready to move to Leisure Village, you might want to go with the Roth approach. Otherwise you'll get hit with some whopping tax bills when you shouldn't be thinking about anything other than shuffleboard and that sexy senior over yonder.
Open a SEP-IRA
Maybe you'd like to save more than $5,000 a year for retirement. If you've got the money, that's not a bad idea. So consider another option-the simplified employee pension, or SEP.
These accounts are similar to traditional IRAs but typically allow you to put in 20 percent of your self-employment income (or 25 percent in some cases) up to a maximum of $46,000 for the 2008 tax year. (These limits may not apply in some cases, so check with an adviser.)
As with traditional IRAs, you get a tax deduction now but have to pay taxes later.
Open a Solo 401(k)
Let's say you want to save a whole lot for retirement each year-tens of thousands of dollars. That's where the solo 401(k) comes in. The funding limits are too complicated to go into here, but they do allow you to save a very big chunk of change annually. Like traditional IRAs and SEPs, solo 401(k)s are tax-deferred, meaning you get a nice deduction now but will be hit with tax bills later. Like IRAs, you can put in however much you want each year or give nothing.
Open a Keogh Account
Confused yet? These options go on and on. But pay close attention because at least one of these might be perfect for you and your bank account. Keogh accounts are similar to solo 401(k)s in that they allow you to set aside tons of money for retirement. You get a tax deduction now and pay taxes later.
They're quite complicated, however. One kind is called a "money-purchase plan" and another is a "profit-sharing plan." If you go with the money-purchase approach, you'll need to contribute the same percentage of your income each year.
Now What?
So let's say you open up an IRA and put money in it. (Contact a bank, a financial adviser or a broker to do that. The broker Vanguard, which you can find online at Vanguard.com, is one of the best.)
And then what? You want your money to make money and not just sit there, but how?
You could hire a financial adviser to give you guidance about what blend of stocks, bonds and mutual funds will be best for you. But if you're feeling brave-or cheap-you can also make decisions yourself.
There are plenty of books about investing on the shelves of bookstores (and Amazon), and the Internet has tons of free information.
Just remember this very important rule: Only take big risks with money you can afford to lose.
-- Andy Winterbottom
This article originally appeared in the September 2008 issue of AVN Online. To subscribe, visit AVNMediaNetwork.com/subscribe.
