Get Started on the Path to Retirement

Physician's Money Digest, June 2006, Volume 13, Issue 6

You know saving money is important to guarantee a comfortable retirement in the future, but it's hard to put away funds for tomorrow when there are so many tempting things to buy today. While retirement may seem far away at times, and you may have felt that your money is better off spent in the present, developing a disciplined saving strategy will help facilitate the transition into your golden years.

The golden rule of retirement investing is the earlier you start saving, the better. The more funds you put away when you start your first job, the less you will have to save each month toward your retirement goals. For example, if you invest $1000 at an 8% rate of return, after 30 years you would have $10,063. On the other hand, if you invested the same $1000 with the same 8% rate of return, but only for 15 years, you would only have $3172. As you can see, time makes a big difference in the compounding power of your retirement savings.

In addition to starting early, you should also think about developing a systematic savings plan to help you set aside money on a regular basis. It is usually easier to save a little over time than to put away a sizable amount of money all at once. While $1000 may seem like a considerable amount of money to put toward retirement all at once, saving just $100 a month can get you closer to your retirement goal. Think about it this way, if you save $100 a month for your retirement and you place it in an investment that returns 8% annually, that amount compounded monthly would give you $150,030 in 30 years.

Individual Retirement Accounts

In order to help get you on your way to retirement, let's take a look at some savings tools that are available to help you reach your goals. IRAs are one of the most common types of savings vehicles for retirement. There are two main types of IRAs: a traditional IRA and a Roth IRA. With a traditional IRA, some individuals are able to take a tax deduction on the amount they contribute to the account, meaning you don't pay taxes on the amount you invest. Instead, you would pay taxes when you withdraw the money at retirement. With a Roth IRA, you don't get a tax deduction on the amount you contribute, but your distributions would be tax-free as long as you have reached age 59½ and you have had the account for at least 5 years. Anyone who earned income during the year can open an IRA, however, you need to be aware that there are age and income restrictions that apply.

Employer-sponsored Retirement Plans

Another popular vehicle for retirement savings for those of you who work for a large group practice or hospital is an employer-sponsored retirement plan, such as a 401(k), 403(b), or 457 plan. These plans allow you to invest a certain amount of money directly from your paycheck. In addition, your employer typically matches a percentage of the amount you contribute to your retirement account, adding to your nest egg. Like an IRA, the contributions to the employer-sponsored account grow tax deferred until you withdraw them in retirement.

Also, if you have reached the age of 50, both IRAs and employer-sponsored retirement plans offer the option for you to make additional contributions to help you catch up on your savings goals. For 2006, catch-up contribution limits allow you to save an additional $5000 in a 401(k), 403(b), or 457 plan, and an additional $1000 in a traditional or Roth IRA.

It is important to remember that these are long-term accounts, specifically designed for retirement savings, and they are not a way to stash funds for a new car or summer vacation. If you withdraw funds before you reach the age of 59½, you may be subject to IRS penalties in addition to income taxes.

The key to achieving your retirement dreams is to start saving early and save often. Talk with a financial consultant about how much money you may need to retire and how to save so you can live the lifestyle you've dreamed of in retirement.

Joseph F. Lagowski is vice president, investments,

and a financial consultant with AG Edwards

in Hillsborough, NJ. He welcomes

questions or comments at 800-288-0901, or

visit www.agedwards.com. This article was

provided by AG Edwards & Sons, Inc, member SIPC. These

examples are for illustrative purposes only and do not reflect

the actual performance of any investment. Systematic investing

does not assure a profit and does not protect against

loss in declining markets. Since such a plan involves continuous

investment in securities of fluctuating prices, the

investor should consider his or her financial ability to continue

purchases through periods of low price levels.