401(k) Matching

How much do you put away for retirement? The answer, invariably, is not enough. Money put into your   401(k) or other pre-tax retirement program is exempt from Federal income taxes, so it benefits you later by having money saved, and benefits you now in terms of lowering your tax burden. It goes without saying that you should, at the very least, contribute as much as your employer will match. For instance, my employer matches dollar for dollar up to the first 3% of salary, and then 50 cents on the dollar up to 5%. Translation: 5% of my salary is contributed, and 9% of my salary goes to my 401(k) equivalent each month.

But I could do more. For 2012, the contribution limit is $17000. http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html That's just under 654 dollars per paycheck, assuming you get paid on a bi-weekly basis. And because most millennials don't believe social security will be there for them when they get older, or at least, won't pay out what it pays now, http://iomechallenge.org/wp-content/uploads/NEW-iOme-Millennials-on-Social-Security.pdf, you should do whatever you can in your budget to get as close to this $17000 figure as possible. One thought could be this. Many people receive bonuses around Christmas or around the end of the year based on performance or other successes. Perhaps using that bonus to make a balloon contribution to your 401(k) would be a better use of the funds instead of consuming them on something unnecessary or trivial.

If your organization doesn't have a 401(k) program or equivalent with employer matching funds, check out my post on an IRA, and then you can at least get a benefit of $5000 a year (you don't get the tax benefit of the IRA if you also participate in a 401(k) or equivalent. If your organization does have a 401(k) or equivalent, start contributing at least to the point of full matching, BECAUSE IT IS FREE MONEY. Then, take a look at your budget and see if you can increase your contribution an extra 100 dollars per month. That's less taxable income, a more financial secure retirement, and intelligent budgeting for the future.

Individual Retirement Account

The first piece of advice I'd offer is to start an individual retirement account. There are two options in this arena. A traditional IRA has current contribution limits of 5000 dollars per year. If you contribute to one of these (which you can start at virtually any brokerage firm (mine is at Vanguard)), you can deduct the amount you contribute (up to 5000) from your tax liability. Also, you don't get taxed on the earnings until you take the money out of your account (like when you are in your fifties or sixties or later). The alternative, a Roth IRA, has the same contribution limits, but you can't deduct the money from your tax liability. However, when you remove the money later in life, all the money is tax-free. Basically, on a Roth, you pay the taxes now, and on a traditional IRA, you pay later. You don't pay taxes on the earnings on either. You can't contribute to a Roth if you make more than UPDATED 107,000 per year. For more details, on things like if you are married filing jointly, check out: http://www.rothira.com/tools/income-limits.php

Now, you may be thinking, why, as a 16 year old, should I think about retirement? First, you should think about lowering your taxes. Second, you can take the first 10,000 of earnings out of your IRA without paying a penalty if the money is for a down payment on your first home. 10,000 in tax free earnings towards the biggest purchase of your life. The third reason is that the longer you save for your retirement, the less you need to save per year. Remember, in retirement, you will be paying less in taxes because you will likely need less money, because large expenses in life like education and a mortgage will be paid off. So, your taxes will be lower. All in all, starting an IRA as early as possible sets you up when you want to buy a home, and when you want to retire.

http://money.cnn.com/retirement/guide/IRA_Basics.moneymag/index.htm

http://www.bankrate.com/finance/money-guides/irs-rules-for-early-ira-withdrawals-1.aspx