Retirement may seem like a long way off for those just beginning their careers. However, there are things people can do in their 20s that will foster great benefits in the future. Paying off credit cards, managing your budget, participating in the state’s deferred compensation plan and contributing to an individual retirement account (IRA) will move you in the right direction for creating a great nest egg for your future retirement. These may be things you’ve been thinking about, but haven’t yet acted on. This article will give you details surrounding each of these money-saving strategies you can address in your younger years.

Getting Credit Card Debt Under Control

Many young adults go through a period where running up credit card bills seems like the most expedient thing to do. The reality of having to pay off the incurred debt doesn’t hit until after the spending spree is over. Reducing your credit card debt in your 20s can aid in your ability to save money for retirement in your future. Money put away for retirement will benefit you in the long run much more than money spent on credit card balances and interest fees. If you are facing high credit card balances, there are several things you can do to get your credit card debt under control:

• Get rid of most of your cards: You may consider transferring the balances from multiple cards on to one low-interest card that you can concentrate on paying off. Put the brakes on your spending: Plan a budget for yourself to examine what you can realistically spend in a month, and stick to it!
• Consider a specific payment plan: Pay off your card with the lowest balance first, then add that monthly payment to the payment you make to your next lowest card. This will allow you to feel a sense of accomplishment as each card is paid off. It also keeps your payments consistent and realistic, which contributes to budget planning.

Planning a Budget

Having a budget is the best way to make sure you are making steady progress toward eliminating debt and saving money for the things you want. A budget will help you feel in control of your spending and will allow you to look into creating a financial plan for retirement savings. There are a few things you can do to begin budgeting for your spending:

• Organize your information: Make sure you can locate tax and income information, such as federal, state and local income tax returns, pay check stubs, election of cafeteria plan withholdings, charitable contribution information, property tax receipts, and tax withholding documents. You should also be able to locate other documents, such as bank statements, real estate records and lease agreements.
• Know where your money goes: Track your expenditures for two months. Break spending down into categories to see what you spend your money on, such as housing, food, insurance, entertainment, etc.
• Think ahead: Keep your savings goals in sight. Concentrate on the day that you buy your new car, move into your new house, or begin your dream vacation. Smart budgeting will help you set goals and keep them within reach.

Once your budget is planned, you will have a good idea of how much money you might be able to set aside for retirement each month. The next step is to decide how to save this money.

Individual Retirement Accounts

A popular savings vehicle for young workers is the Individual Retirement Account (IRA). Those who start putting money into an IRA early will reap interest rewards in the long run. An IRA is a personal retirement savings account available to anyone receiving compensation, such as wages, salaries, or bonuses. Individuals may contribute up to $4,000 per year to their IRA. The money that you set aside grows tax free. At age 59 ½, you may begin withdrawing funds. It is important to remember that an IRA is a savings account for your future, and the accounts are not designed for owners to withdraw money throughout their lifetime. Aside from a few exceptions, if you withdraw money prior to age 59 ½, you will be taxed an additional 10% of the withdrawn amount for early withdrawal.

There are several different types of IRAs. The two most commonly known are traditional IRAs and Roth IRAs. There are advantages to both.

• Traditional IRAs: In most cases, contributions made to traditional IRAs are tax-deductible. Tax is not incurred on money contributed to a traditional IRA until it is withdrawn.
• Roth IRAs: While contributions to a Roth IRA are not tax-deductible, that money and the interest earned on it may later be withdrawn tax-free. For the younger worker, a Roth IRA may be particularly attractive, as your money will have more time to accrue interest, which you will be able to withdraw tax-free at age 59 ½.

To help determine which IRA might be right for you, visit MOSERS online calculators.. We offer two IRA calculators: one that compares the financial implications of both the traditional and the Roth IRA, the other is for those who already have a traditional IRA, and might be interested in the implications of moving their money to a Roth IRA.

For more information on opening an IRA, we recommend that you contact a financial planner or visit the following websites:

• Motley Fool
• The National Association of Personal Financial Advisors
• The Financial Planning Association
• Certified Financial Planner Board of Standards, Inc.

For more information on basic financial education, plan to attend a MOSERS Money Matters workshops.

Sources: MOSERS - PensionsPlus On-Line Newsletter - Summer 2005