June 06, 2011 08:00 AM
By Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management
When it comes to managing money, many of us can be a little shortsighted, focusing on upcoming financial goals and neglecting those that are further away. For instance, we might amass money for a house down payment in our 30s, save for our kids' college education in our 40s and then finally turn our gaze to retirement in our 50s.
But while this might seem like a logical way to proceed, it could be a mistake, because you may end up shortchanging your retirement. Indeed, you should probably endeavor to deal with these major financial goals concurrently, rather than consecutively, for three reasons.
First, it can often take 30 years or more of diligent saving to accumulate a decent-size retirement nest egg. If you put off saving for retirement while you focus on other goals, you may funnel too many dollars into your home and into your children's college education--and leave yourself without enough money for a comfortable retirement.
Second, by handling life's goals as they arise, you will always be dealing with a relatively short time horizon and that will likely necessitate a fairly conservative investment strategy, because you don't have the time to ride out a stock-market downturn. By contrast, if you start saving for retirement in your 20s or 30s, you should have decades until retirement and thus you might buy stock-market investments in pursuit of higher returns.
Third, by putting off saving for retirement, you could miss out on some handsome tax benefits. Funding a traditional Individual Retirement Account or 401(k) plan may give you both an initial tax deduction and tax-deferred growth. Meanwhile, a Roth IRA or Roth 401(k) might provide federal tax-free growth.
Funding a 401(k) may also earn you a matching employer contribution. Indeed, failing to invest enough in a 401(k) to earn the full employer match can rank as one of the more foolish financial mistakes.
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