Legally Thrifty: Building Your Nest Egg

Spring is not only about shopping for fabulous new clothes.  It’s time to start thinking about building your nest egg, if you haven’t already. 

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Retirement funds are a key aspect to anyone’s finances, but especially for women who may not be as well informed.  Statistics have traditionally shown that equally qualified women are consistently paid less than their male counterparts for the same positions in the same line of work.  While the gender gap is closing, the fact remains that women need to be able to save just as much money while potentially earning less income.  Moreover, women live longer than men, so you may need a bigger nest egg to support yourself after retirement.  Elderly women are more than twice as likely to be poor than elderly men.

So how to get started gathering the twigs for your nest egg?  We return to the oldie-but-goodie lesson of maintaining a budget, which hopefully you’ve been doing since the first episode of Legally Thrifty.  The recommended breakdown of your budget is as follows. 

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Keep in mind that these percentages don’t take into account the inevitable discrepancies of living in a high cost area.  So your housing and transportation allocations might be higher or lower depending on whether rent is expensive in your city or if you own a car and pay for insurance, parking fees, etc.

After you’ve figured out how your current spending correlates to the recommended percentages, see if you need an attitude adjustment on how you view saving for retirement.  Most people think in terms of “income – life spending = savings,” but the correct attitude is “income – savings = spending.”  You should pay yourself first and consider savings as necessary an expense as paying rent. Deduct a set amount from each paycheck to go towards your savings account or retirement fund.  Whatever is left over is yours to spend as you please on shopping, entertainment, and the like.  It’s not play first, contribute later, but contribute first, play later.

Now you must choose what kind of nest egg to build.  Here is a quick rundown of the main retirement accounts that are available.

  • 401(k)

You set up a 401(k) through your employer, who holds money from your paychecks to automatically put in the account.  Ask your employer if they do a matching 401(k) where they “match” the amount of your contribution and essentially double your contribution each time.  This means that you have increased incentive to put more into your account!  Another benefit of the 401(k) is that the money in your account can grow tax-free.  You only have to pay taxes when you take the money out.

  • Traditional IRA

Like the 401(k), your contribution to the traditional IRA isn’t taxed as it grows and you pay the taxes upon withdrawal for retirement.  A caveat benefit for those who qualify – tax-deductible contributions!  This option is only available if your income is below $58,000 single or $92,000 if married AND you don’t get a 401(k) through your employer.  You can set up a traditional IRA with a brokerage firm such as Charles Schwab or Merrill Lynch.

  • Roth IRA

The taxing method for the Roth IRA differs from its counterparts.  You pay the taxes upfront and in return, you don’t have to pay taxes on the investment earnings.  Compared to the traditional IRA where you’re taxed on the entire amount for withdrawal, you’re only taxed on the actual sums that you put into the Roth IRA.  However, the Roth IRA has an income limit of less than $110,000 single or $173,000 married, so this huge benefit is not an option for those who are fortunate (or not?) to earn a higher income.

Let’s say that you’re already financially savvy and contribute 10% or more to one of these retirement accounts.  Challenge yourself and increase your contribution by at least 1%.  If you’re currently maxing out your retirement plans, then you’re a financial superstar and Legally Thrifty might be too simplistic for you.  So leave us some of your tips in the comments below and share your superstar knowledge.  Happy financial nesting!

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