Saving and Investing for Life

Jar Filled With Money For Saving And InvestingSaving and investing for retirement is a long-term goal of just about every working person in America. And unless you win the lottery, creating a comfortable retirement doesn’t happen by accident and doesn’t usually involve luck. It takes planning, discipline, and time. Here are some strategies and tips:

Start right now. Let’s start with some math:

$2,000 compounding at 7% for 20 years = $7,739.37

$2,000 compounding at 7% for 30 years = $15,224.51

$2,000 compounding at 7% for 40 years = $29,948.92

Does that get your attention?

If you’re in your 20’s, you’ll have to save 12-15% of your gross income per year in order to retire comfortably; but if you’re in your late 30’s or 40’s, you’ll have to save 20-25% per year to end up with the same amount of money. And, you’ll probably have to invest more aggressively if you start later, too. So if you haven’t started saving, BEGIN WITH YOUR NEXT PAYCHECK. You can’t afford not to!

Calculate how much you are likely to need. Experts say that you will need about 70-80% of your current income to retire comfortably, as there are some expenses, such as your home mortgage payment, that you probably won’t have by the time you’re in your 60’s. Meanwhile, if you live in New York City or many cities in California, the number is more like 100%, as the cost of living is always much higher in those areas. There are lots of variables that go into this calculation, including the amount you may get from Social Security. To calculate your future income requirements, we recommend the retirement calculators at or

Contribute as much as you can to employer-sponsored plans. If the company you work for has a 401(k) plan, a 403(b) plan, a pension plan, or any other plan that is tax-sheltered (meaning, you contribute to it with pretax dollars), you should fund it with the maximum amount allowable each year.

This is especially important for plans where the employer matches the contributions of its employees; its like free retirement money!

WARNING: Read every word of your plan, as it contains vital information regarding your retirement money. For instance, “vesting” is your right to take full possession of your contributions and the contributions of your employer, but it doesn’t happen immediately. So if you are not fully “vested” and you leave your employer, you will only be entitled to get back the money you contributed and a portion of the employer’s match.

Also, remember from Module 11 that you should diversify your savings/investments, to protect your financial assets. As you contribute toward a company 401(k) plan/403(b) plan/pension plan, be sure not to put all of your eggs in one basket.

Never withdraw funds from a tax-sheltered retirement plan. When you withdraw funds, you are taking a “distribution”. And if you take one before you are allowed to (usually after you have turned 59?), you’ll have to pay tax penalties to the government.

If your employer doesn’t have a retirement plan, start one for yourself. IRAs (Individual Retirement Accounts) are traditionally tax-sheltered accounts with maximum allowable contributions ($4,000 in 2005 unless you’re over 50; then it’s $4,500).  There’s also the Roth IRA, which is structured a bit differently: Your contributions aren’t tax-deductible, but your distributions are. Roth IRAs are great for people in their 20’s and 30’s, who have many years of tax-free compounding available.  If you’re not sure which type is for you, most mutual fund web sites worksheets to help you decide. For example, see or With both types of IRAs, you decide when you’ll contribute and what you’ll invest in. There are a lot of rules and definitions you must familiarize yourself with, so be sure to read all materials thoroughly.

If you are self-employed, SEP-IRAs (Simplified Employee Pension IRAs) have higher maximum allowable contributions than traditional IRAs ($15,000 in 2005). Again, make sure you read all materials thoroughly.

Note: If you work for a small business and your employer offers a SEP-IRA, only your employer can make contributions (up to 15% of your total compensation, and they don’t reduce your salary). But you may also start an IRA for yourself and contribute to that yourself!

Pay yourself first. If you’re controlling your contributions to a retirement plan, have the   money deducted directly from your paycheck and into your plan.  This way, you’ll never even see the money, and you know what they say: You won’t miss what you never had!

How to Invest and Save for College

As with saving for retirement, when you’re saving for a goal that is years away, you’d like to do two things: Start early, and take advantage of opportunities to save on taxes.

TIP #1: To calculate how much your child’s education is likely to cost, go to and click on “Solve” to get to the calculator page.

TIP#2: Your child’s eligibility for financial aid will probably be affected by the use of any of the plans described below. Go to for details.

There are two types of plans to choose from:

1) The Coverdell Education Savings Account (formerly called “Education IRA”).  This is similar to a retirement IRA—you put money into an account and invest it so it grows. In this case, it covers the expenses for the future education of your child:

  • You can make a contribution of up to $2,000 per year. The money grows tax-free; and neither the contribution nor the interest is taxed when you make a withdrawal, as long as you use it for education purposes.
  • One big advantage of the Coverdell account is that it can be used for grades K-12, as well as college education and beyond (up until your child is 30 years old). The money in a Coverdell account can be used for tuition to any private elementary, middle, or high school—even a religious  one.
  • However, any money you invest in a Coverdell account is considered an asset of your child’s, which could hurt him when the time comes to apply for financial aid.  According to financial aid formulas, which vary sharply from school to school, assets of the student are counted against financial need at a much higher rate than parents’ assets. As there are numerous rules, it would be wise to read the account requirements thoroughly.

2) College Savings Trust Funds (also called “529 plans”). These are state-sponsored investment   programs, offered in all 50 states, to be used solely for college expenses. Again, the idea is that you put money in an account and invest it so it grows enough to meet the cost of the future education. To find out the details of your state’s 529 plan, go to

Under the plan:

  • Anyone can contribute to the account
  • The investment earnings grow tax-free
  • Investments offered are age-based, which makes investment selection a lot easier
  • Distributions, which must be used for qualified college expenses, are also tax-free
  • If the child doesn’t want to go to college, you can roll the account over to another family member
  • Most states have no age limit for when the money has to be used
  • Unused money can be withdrawn without triggering a penalty
  • The Prepaid-tuition 529 guarantees that the return on the money saved in the account will match the average increase in tuition at state-run colleges. You are basically locking in today’s tuition rates with either a lump-sum purchase or monthly installments.

Saving and Investing for an Emergency

It’s often difficult to convince someone to make saving for an emergency a priority. Until that person has an emergency, such as a major health expense, the loss of a job, the death of a spouse, a divorce, or even a natural disaster, such as a hurricane, tornado, or earthquake.

On or near the top of everyone’s goal list, to be trumped only by “Getting out of debt,” should be “Saving three month’s worth of living expenses.” That’s your emergency fund, and there’s no time like the present to start saving for it.

Here are some tips:

  • Pay yourself first. We’ve repeated this many times throughout this series. If you allocate money to your financial priorities as soon as you get paid—before you even pay a bill—you are more likely to stay on track and achieve your goals.
  • Make sure the account is “liquid”. “Liquidity” refers to how quickly an asset can be converted into cash. For instance, your house is not considered a liquid asset, because it could take months to sell, and there are many variables involved. Your checking account, on the other hand, is liquid, as you can get out what you put in virtually instantaneously. Accounts appropriate for your emergency fund are the same ones we discussed in Module 11 when we were addressing money saved for the short-term.

Where to Build Your Emergency Fund

  • Checking Accounts
  • Savings Accounts
  • Money Market Deposit Accounts (MMDAs)
  • Money Market Funds
  • Certificates of Deposits (CDs) with short-term maturities
  • Only use your emergency funds for emergencies. If you find yourself using some of the funds now and then, open an account at a different bank, and don’t carry the ATM card or the checkbook, or anything else that might make it easy to access your emergency money.
  • Make sure you are adequately insured. Insurance is one of those things we’d all like to do without, because most of the time we don’t end up needing it. But imagine needing it and not having it. Now there’s an emergency! When we say that your emergency fund should have three month’s of living expenses in it, we’re assuming you build some measure of protection with adequate Homeowner’s insurance/Renter’s insurance, Health insurance, Automobile insurance, Life insurance, and Disability insurance.

Let’s Recap…

In this module, we discussed how to save and invest for various life events that may impact your financial health substantially:

  • Saving and investing for retirement is of vital importance for everyone, and there’s a retirement plan suitable for anyone who earns income. Whether you go through your company plan or start one for yourself, you can reach your goal of a comfortable retirement with some planning and discipline.
  • Saving and investing for college is easily and conveniently accomplished through either a Coverdell education Savings Account or a 529 plan. Again, there’s something for everyone!
  • Saving and investing for an emergency is just as important as getting out of debt, and it should be high on your list of priorities. If you are adequately insured, three month’s of living expenses is an appropriate goal for your emergency fund.