Uh-oh! You just realized you have a retirement to plan for, and you haven't done anything about it yet. Time to get on the horse and start ridin'!
Fortunately, you have a lot of options available to keep you from eating dog food in your retirement years. Knowing what to do first, however, is often the biggest challenge.
Do this now
Here's a primer, then, on what you should do right now to get your retirement planning up to speed. Just because you've fallen behind, that's no reason to stay behind. And this two-step plan is simple to get started.
1. Call your employer. Most companies these days have some sort of deferred-compensation plan they offer their employees, whether it's a 401(k), 403(b), or 457. The numbers come from different sections of the IRS tax code and apply to different types of employers, but all of the plans refer to relatively similar retirement-benefit packages.
Unlike a pension -- which is called a defined benefit plan -- these retirement options are known as defined contribution plans. You're putting in a set amount regularly, and you can tap into it when you retire. Choose your investment options wisely, and you might just retire with a million-dollar nest egg. If your plan offers a low-cost index investment like the Vanguard Total Stock ETF (AMEX: VTI ) , that's often a great place to start -- it gives you instant diversification and can serve as a ballast for the rest of the portfolio.
There are a number of reasons you should pay into your employer plan first. The money is automatically deducted from your paycheck, so you don't touch it and never miss it. It's tax-deferred, which means that if you have $100 deducted each week from your paycheck, your take-home pay if reduced by only $75 if you're in the 25% tax bracket. You won't pay taxes on the money until you retire and withdraw it. By that time, you'll probably be in a lower tax bracket.
Although some plans let you borrow on your balance, smart Fools don't do this. While you may have a lower interest rate and think that you're simply borrowing from yourself, when you remove those funds from your account you're not having all of your money working for you toward your retirement. Leave it in there, and don't think about touching it.
After you leave your job, you can withdraw the money at any age without a 10% penalty, although you will have to start taking mandatory minimum distributions from the account when you turn 70 1/2. The Motley Fool has a 401(k) Center that can answer all your questions.
2. Call up Senator Roth. We have the late senator from Delaware to thank for the next step in your retirement scheme. William Roth was the father of the Roth IRA, an individual retirement account in which the earnings grow tax-free.
Another difference between a Roth IRA and a traditional IRA is that contributions to the former are after-tax, while those to the latter are pre-tax, like the 401(k) plan. A traditional IRA gives you an immediate tax deduction, but the Roth IRA is often the better bet. As long as you wait until you turn 59 1/2 before you start withdrawing money from the account, everything you take out is free of income tax.
Consider a mix of investments in these kinds of plans. With dividend payers such as Pepsi (NYSE: PEP ) and Procter & Gamble (NYSE: PG ) , you'll get growth and income. Combine them with more aggressive, small-growth prospects such as Nabors Industries (NYSE: NBR ) , Dolby Labs (NYSE: DLB ) , and MEMC Electronic Materials (NYSE: WFR ) to get more potential for huge capital appreciation. Quality companies that you hold for years, if not decades, are the proven ways to amass great wealth.
There are a number of other benefits of a Roth IRA, such as no minimum distribution requirements regardless of your age and the ability to include them in your estate planning. Your beneficiaries can inherit the money in a Roth IRA without owing any income taxes. You can check out the Motley Fool's IRA Center for more information.
Of course, it can't all be blue skies and green grass. The government has put some limitations on Roth IRAs, including a $4,000 cap on contributions this year. (That cap is scheduled to rise to $5,000 next year.) In addition, if your income's over a certain amount -- $114,000 for single filers and $166,000 for joint filers -- then you won't be allowed to contribute to a Roth at all. Others near these income levels may face reduced contribution limits.
Still, until or unless you reach those thresholds, you should be trying to max out your contributions to them. The 401(k) plans and their ilk have contribution thresholds of $15,500. Try to max out those contributions first -- particularly if your company has a contribution-match plan -- that's "free" money.
You can Rule Your Retirement
If you need help making the right retirement decisions, the Fools at Rule Your Retirement can help with calculators, rules for asset allocation, and how-to guides to supercharge your retirement options.
Dogfood dinners and a life of penury don't have to be in your future if you take charge now. Even if you think you've waited "too long," there are options available to you. The important thing is to grab the reins and dig the spurs into those horses galloping toward your retirement.