Save Invest Retire

CNN Money had a nice article this morning on four ways to Fool yourself into saving smarter. It generally took a carrot-and-stick behavioral approach to saving. If you are already well on your way with your own system the behavior tips may not be helpful, but there were two tips that are great for anyone:

1. Put your savings on autopilot. No matter who you are, making saving an automatic process, by having money deducted from your paycheck or bank account is probably the best and least painful way to save real money. I have my ingdirect account withdraw a set figure from my direct deposit checking account every payday and I don’t even miss it because I never see it there to begin with. This method can be used for savings, investing in stocks, or investing for retirement, or even just saving a bit for a special purpose.
2. Invest in a Roth 401(k). A little twist on the usual Roth IRA advice, if your employer offers a Roth 401(k), take it instead of or in addition to a regular 401(k). There are a number of reasons why you may want to do this, so you will have to (1) see if your employer even offers it, and (2) look at your particular situation. Some reasons why you may want to use it are that you can effectively contribute more to a Roth 410(k) because you are using after-tax dollars and you can take advantage of tax-free growth if you will be in a higher tax bracket at retirement.

Note: This is not tax advice, please consult the IRS or your local tax professional.

A traditional IRA (individual retirement account) is an account in which you can take tax deductions for certain retirement contributions. Those contributions are not taxed until retirement, at a time when you will likely be taxed in a lower bracket. Depending on the math, if you are facing a large tax burden, an IRA contribution may be a good way to lower your 2007 current tax bill while boosting your retirement savings.

Here’s a simple example showing how it can help: Say you are in the 25% tax bracket and you noodle your way through your 2007 tax return and realize you are going to be nailed with a $1,000 tax bill. If you are within the income limits, you can make a contribution to a traditional IRA for $4,000 before you file your return or April 15, 2008, whichever comes first, and reduce that $1,000 tax liability to $0. Meanwhile, you’ve also put away $4,000 towards your retirement that you would not have otherwise.

The general rule is that if you are under 50, you can contribute up to $4,000 to a traditional IRA. It’s $5,000 for those over 50. If you or your spouse are covered by a retirement plan at work, you may only receive a partial deduction if you make more than the Modified Adjusted Gross Income (MAGI) limits.

The MAGI limits are not real high if you are already covered by work retirement plans. For example, if you are filing jointly and you and your spouse are both covered by work retirement plans, you only receive partial deductions if your AGI is between $83,000 and $103,000, at which point you stop receiving a deduction.

IRA contributions for the 2007 tax year are due by April 15, 2008 (that means a check postmarked by that date), or whenever you file your tax return. There are exceptions, but generally you cannot contribute to a traditional IRA for a tax year for which you have already filed a tax return.

So this means if you could potentially owe taxes you need to look at this soon to give yourself enough time to fully explore the option to see if it will help your specific tax situation as well as saving up the actual contribution before the tax deadline.

You can explore all the details of IRA contributions in the IRS’s Publication 590- 2007 IRAs or with your own tax professional.

The secrets to building wealth are simple and embodied in the title of this site: Save-Invest-Retire. Paul Navone did just that, although instead of retiring he donated MILLIONS to charity after a lifetime of working for $11/hour.

Donor built millions on $11 an hour | Philadelphia Inquirer | 01/13/2008
RICHLAND, N.J. - Paul Navone worked in mills in and around Vineland for 62 years, never earning more than $11 an hour. He buys his clothes in thrift shops. He doesn’t own a phone. And he doesn’t have a TV: The last thing he recalls watching was Neil Armstrong walking on the moon in 1969.

Yet through a combination of frugal living and smart, disciplined investing, the 78-year-old retiree from nearby Millville was able to give $1 million to Cumberland County College last month.

In addition to that first million, he gave another million to a prep school for a swimming pool.

What was his secret? Well, it’s not rocket science, but it’s also not necessarily easy; he saved and invested. Navone saved while living with family before buying a dwelling where he could live in one unit and rent out the other. He bought some more properties and for decades steadily handed money over to his investment guy, avoiding touching it while letting it grow.

If Navone can become a multi-millionaire while making $11 an hour, what’s stopping the rest of us?