Think you're running out of time when it comes to prepping for retirement? Think again, my friend. You can still get the job done, and now's the time for all last-minute types to come to the aid of their financial futures. Here are three ways of doing just that.
1. Fully fund a Roth.
As I explain here, a Roth is one terrific investment vehicle. Your earnings grow tax-free, and Uncle Sam won't touch your withdrawals when you hit the proverbial back nine -- which in this case is defined as age 59-and-a-half -- either. What's more, unlike with your company-sponsored retirement plan, you can put your money where your mouth is: behind precisely the kinds of investments that suit your timeline and tolerance for risk to a proverbial T.
Investors of the growth persuasion, for instance, may want to gravitate toward the racy likes of Las Vegas Sands (NYSE:LVS), DirecTV (NYSE:DTV), and Celgene (NASDAQ:CELG), companies with forward-looking earnings-growth prospects (analysts expect 20% or more over the next five years) that have helped propel their stock prices in 2006. Indeed, each of the aforementioned has cranked out a gain of more than 70% on the year.
On the other hand, maybe you're more of a buttoned-down type with a preference for long-haul overachievers trading at a discount. Berkshire Hathaway (NYSE:BRK-B) and Caterpillar (NYSE:CAT) fit that bill, as do Archer Daniels Midland (NYSE:ADM) and First Data (NYSE:FDC). For the 10 years that ended with November, in fact, each has delivered a better return than the S&P 500 yet currently sports a price-to-earnings (P/E) ratio that falls significantly below that benchmark's.
No matter which way you go, the facts are these: A 50-year-old who contributes $5,000 per year -- the Roth maximum for the 50-and-over set in 2006 -- and earns the market's historical return of roughly 10% will have nearly $160,000 in the bank when she turns 65.
That's not too shabby, but needless to say, you'll need to do a bit better than that to hit your financial goals. More on that in just a minute. For now, it's time for a word from your father-in-law.
2. Pay yourself first.
OK, so it was my father-in-law who first shared this bit of Foolish wisdom with me, but it's excellent advice for everyone. Here's how to put it into action:
If during the course of the next year, you're the lucky recipient of a pay raise, or if you've finally paid off a substantial debt, such as a car loan or a hefty credit card balance, don't spend your windfall: invest it. You've been living just fine without that additional moola up til now, right?
Right. Our advice, then, is to proceed as though you were still earning your old salary or that you still had debt to pay down on a monthly basis. That way, you won't even miss the money, and you'll become, so to speak, your own creditor, albeit with a crucial difference: Rather than paying off a car or an outstanding credit card balance -- plus interest! -- you'll be funding your financial future.
You can use that extra loot to fully fund a Roth and/or to ...
3. Participate in your company-sponsored retirement plan.
With retirement plans such as a 401(k), you can kick in up to $15,000 per year, and your employer may provide a particularly sweet incentive to participate: Free money, in the form of a matching contribution!
Even if your company doesn't match, we're still talking serious money in the bank. Using the same set of assumptions outlined in my first point above -- and a $15,000 annual contribution -- a diligent retirement-plan saver will see his nest egg swell to more than $470,000 by the time he's blowing out 65 candles on one serious fire-hazard of a birthday cake.
That's impressive, and if your employer's plan isn't exactly studded with terrific investment options, not to worry: In the next installment of the Fool's new GreenLight service, we'll show you how to make the most of even a lousy 401(k) plan.
The Foolish bottom line
If you're serious about playing catch-up, now's the time to get going. The three-step plan outlined above will give you a jump-start, as will staying on top of the savings game.
If you'd like the inside scoop on that game's rules, consider taking GreenLight for a risk-free spin. From finding great investments to clamping down (hard!) on expenses, we aim to get you up and running and ahead of the financial curve in no time with specific, actionable advice. Click here to check out GreenLight for free. Your future self -- the one who's looking forward to a comfy retirement, preferably someplace warm -- will thank you for it.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises GreenLight. At the time of publication, Shannon didn't own any of the securities mentioned above. First Data and Berkshire Hathaway are Inside Value recommendations. You can check out the Fool's strict disclosure policy by clicking right here.
