Tuesday, May 27, 2008



I read in this week's The Kansas City Star Moneywise: how to save for retirement. Basically, it says to save 10-15% of your pretax income. It is very important to start early. If you don't, and instead chose to wait until you're 45, then you need to save 20%. Wait until you're 55 and not only you have to save 40%, but you also have to delay retirement until you're 70 years old.

What about inherintance? Well, the way I see it is that IRA is inheritance, albeit the one that you have. Think about it: if you put $10,000 in IRA, and let the magic of compounding interest grow the account, then even if you do nothing, you'll have over a million dollars in the account over 40 years, depending on the interest rate. All you have to do is put some seeding money and wait 40 years.

What kind of account should you have? 401(k) if you have it. Then Roth IRA, then Traditional IRA. Leftover money should be spent in stocks while you're working, and bonds when you retire, IMO.

How much do you need? That depends on your spending. If you spend $50,000 per year, then you need about $500,000 at 10% interest. But you also need to save 40% of your income for reinvestment, so double that figure to $1,000,000.

The key is in the spending. If you regularly spend only $20,000 per year, then $400,000 is enough. Can you save $400,000? Over 40 years that's $10,000 per year. Not too difficult. Especially with compounding interest magic.

So save early and often! If you carry debt at all, you want to eliminate those first. Bad consumer debt first. Good equity debt second. Then save.

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