Saving money for retirement - Part VI

As previously stated, due to an uncertain future of tax rates, health insurance costs, college costs for kids, changing government regulations, and increased life expectancies, I believe it is near impossible to predict how much we'll actually need to save for retirement. Therefore, the amount you need is A WHOLE LOT! That's all you need to know - you need A LOT. And if you need a large pile of money for retirement, you need to start saving now. The sooner you make the pile of money "sorta big," the bigger it will be upon retirement.

Here is the sixth pitfall that I believe you need to avoid on your road to retirement:

6. Failing to take advantage of a.) IRAs, and b.) 401(k) matches

IRAs and 401(k)'s are the preeminent retirement vehicles at our disposal - not taking advantage of them is foolish.

With an IRA, you have a limited amount you can invest each year ($4,000 in 2007, $5,000 in 2008, higher if you're over 50), so it behooves you to max it out each year to the best of your ability. Coupled with the magic of time and compounding, this gives you the best fighting chance to have a sizable retirement nest egg. $4,000 a year doesn't seem like a lot of money when you think about it in retirement terms (you used to only be able to stash $2,000/yr in an IRA). It just doesn't feel like you're going to get there on a mere $4,000/yr. But it adds up. If you start stashing $4,000/yr in an IRA returning 8% per year, you'll have over $450,000 in 30 years. If you are married and your wife does the same, you'll together have $900,000. If you earn 10%, the historical return of the S&P 500, you'd have two accounts worth a grand total of $1,328,000. Now $4,000 doesn't seem so puny!

With a 401(k), if you're lucky enough to work at a place that offers a match, make sure you max out the match! If your place of work matches 25 cents on the dollar up to 5%, be sure that you withhold 5% from your paycheck. If this is too much to withhold from your check, then you're not pinching enough in other areas. You should never be too poor to take FREE MONEY. Most 401(k) plans have vesting schedules, i.e., you do not legally own the match portion of your investment until you work at your employer for a certain number of years. Even if you're not sure if you plan to remain at your current employer, you should still take full advantage of the match. At the very least, you'll be saving for retirement. At the most, you remain at the employer for the entire vesting period and you receive a bunch of additional free compensation that grows tax-free.