Spiritual Financial Planning
Planting the Seed for Your Retirement

In this third and final installment on saving, Lindsey talks about the importance of saving for retirement and two key ways to begin planting the seed for a fruitful retirement.

This is the big one: retirement. I know young people often don't like to think about this but it’s extremely important - you certainly can't count on your parents or (possibly) Social Security to support you! By planning now for your retirement, which for many of us may extend well into our 80s and 90s, you can help ensure that you’ll be able to live the kind of life you want. Do you want to travel teach? Pioneer? Own a big house or have some property so you can host cluster activities? Then you need to start planning now. And the earlier you start the more you can make your money work for you.

The two central retirement plans we’ll be looking at are available to most everyone: 401(k)’s (called a 403(b) if you’re working in a non-profit) are usually offered through your work if you have benefits, and Roth IRAs. 401(k)’s are employer sponsored retirement plans, and Roth IRAs, or Individual Retirement Accounts, are a kind of retirement account allowed under US tax law. The major difference is whether the money you use to fund these plans is taxed before you invest it (IRAs) or after (401(k)). Let’s look at some of the key features of both.

With many 401(k)/403(b) accounts the employer will match your contribution. That means free money for you! Virtually all financial planners suggest that this is one of the first things you should do for retirement—contribute enough to your 401(k) to get the full employer match. Another important feature is that since the money is not taxed before you contribute to your account you're contributing more of your dollar. With an IRA, for example, let's say your contribution is taxed at 20%. That means for every dollar you invest you're really investing $.80. With a 401(k) you're investing the whole dollar and your taxes are paid (on principle and earnings) once withdrawal begins later in life.

Particularly for young people many experts recommend establishing a Roth IRA after, if applicable, getting the employers match for your 401(k). One of the major reasons is that most people will be in a higher income bracket when they retire so it often makes more sense to pay the taxes on the money now. Let's say you contribute the maximum each year to your Roth IRA, which is $4000 depending on your income level. With an Roth IRA you pay taxes on that $4000. But let's say when you retire you have $500,000 in your Roth IRA. You can begin withdrawing money tax free after age 59. On the other hand, with a 401(k), let's say you have $500,000 saved up by the time you retire. As you begin to withdraw money you'll be paying taxes on those withdrawals, which will most likely be several thousand dollars by that point. The question is: Do you want to pay taxes on $4000 for a Roth IRA investment or on the $30,000 you withdraw each year from your 401(k)/403(b)?

Some other key elements of Roth IRAs help you in other ways - for example, earnings on Roth IRAs grow tax-free. These earnings will be substantial for a young person because of compounding interest (remember the summer example from the last article?). You can also withdraw the principle at any time with no tax penalties for things like a down payment on your first home (provided you have had the account for 5 years) or qualified school costs.

You can open an Roth IRA at any number of banks and brokers.

So Now What?

So you have some money sitting in your bank account and you aren’t sure what to do. For many people most financial planning experts recommend that your savings priorities should be:

1. Make a budget for your short and long term saving-priorities and budget accordingly (see our budgeting worksheets). This will help you map out your spiritual and financial goals and how to make them meet;

2. 3 - 6 months living expenses in emergency fund;

3. Max out your contribution for a Roth IRA or your 401(k).

Many people our age are just starting out and don’t have much money to set aside, but right now is exactly the time to begin saving for later on in life. Remember Baha'u'llah’s admonition to see the end in the beginning. By putting just a little bit towards each of these goals you’ll be able to ensure a number of options for you.

If you’d like to learn even more there’ll be more articles here, and there are a number of other sites online that offer sound financial advice. What sites have you found to be useful?

Have fun as you begin the journey of becoming financially stable, and even more importantly, flexing your spiritual muscles!