10.27.06
How to jump-start your savings
After-tax savings are critical for retirement. Normally, once these reach a certain size, they will be invested in mutual funds or some other balanced investment of stocks and bonds. Appreciation in value there will be taxed at the relatively low capital-gains rate. But your pre-tax savings, via 401(k) and other devices, are untaxed—until you retire and start to withdraw them, at which point they are taxed as ordinary income. That can be a sizeable chunk, and thus the balance you see does not reflect the money you will be able to live on in retirement: some percentage of that (25%? 30%?) will be going to pay your Federal income tax. Your Social Security retirement payments are also taxed as ordinary income.
So: set up some sort of regular monthly savings now. For most people, putting aside 10% of their take-home pay will not affect their standard of living, though some are living right to the edge of their income (always a dangerous thing).
Ethan said,
27 October 2006 at 7:35 pm
But first you’d want to max out your pre-tax savings options… better to pay the tax after getting the benefit the investment returns, not before.