The Money Class Part 7

- Have large cash reserves before you launch a start-up: an eight-month personal emergency fund and a separate business savings account equal to twelve months of your antic.i.p.ated operating costs.

- Keep your overall credit card balances (personal and business) below 30% of your outstanding credit limits.

- Carefully consider your expansion plans. Trust your gut on what is the right move for you.

- Stand in the truth if your business is not able to produce the revenue you need to be self-sustaining. Closing down a business is a sign of strength; going deep into debt-especially tapping personal a.s.sets such as your home equity-is the worst career move you will ever make.

A Note About the Retirement Cla.s.ses The rules of retirement planning-and living in retirement-are so critical and so complicated that I could not limit the information to just one cla.s.s. Therefore, I have divided the subject into three separate cla.s.ses aimed broadly at three different stages in life: - Retirement Planning in Your 20s and 30s. This cla.s.s provides lessons on how to make the most of your most valuable a.s.set: your age!

- Retirement Planning in Your 40s and 50s. This cla.s.s covers all the mid-course fine-tuning you must make at this critical juncture to ensure you will indeed reach your retirement dreams.

- Living in Retirement. This cla.s.s includes steps current retirees can take today to make the most of their money amid current record-low interest rates.

I encourage you to jump right to the Retirement Cla.s.s that addresses where you are as of today. But I also hope you will circle back and read the other chapters as well. As I shared in the Family Cla.s.s, the more we start talking to our loved ones about money the stronger we will all be. Reading the other Retirement Cla.s.ses can be a way to start important conversations. It's also a way of preparing yourself for what lies ahead-and a way to educate yourself about what your children and their children might be up against too.

The Money Navigator A Special Offer for Readers of A Special Offer for Readers of The Money Cla.s.s The Money Cla.s.s Mark Grimaldi is the chief economist and portfolio manager of the highly respected Navigator Newsletters Navigator Newsletters, monthly newsletters that offer information on the economy and investment advice for no-load mutual funds, ETFs, and 401(k)s. Mark has an uncanny record: He accurately forecast the bursting of the housing bubble, the economic recession, the great gold rush, and other market milestones. I am an admirer of Mark's work, so I was thrilled by the idea that together we could offer something special for readers of The Money Cla.s.s The Money Cla.s.s who are interested in learning more about ways to invest. who are interested in learning more about ways to invest.In The Cla.s.sroom at www.suzeorman.com you will find a link and instructions to activate a free one-month subscription to you will find a link and instructions to activate a free one-month subscription to The Money Navigator The Money Navigator newsletter. This online newsletter includes Mark's recommendations of no-load mutual funds and ETFs that invest in dividend-paying stocks. It will indicate what advice to follow depending on your age and where you are in your retirement planning-just as I've organized the retirement information in this book-and will help you build the right portfolio for you. To learn how to enter The Cla.s.sroom, see newsletter. This online newsletter includes Mark's recommendations of no-load mutual funds and ETFs that invest in dividend-paying stocks. It will indicate what advice to follow depending on your age and where you are in your retirement planning-just as I've organized the retirement information in this book-and will help you build the right portfolio for you. To learn how to enter The Cla.s.sroom, see this page this page of this book. of this book.

CLa.s.s.

RETIREMENT PLANNING.

GETTING GOING IN YOUR 20S AND 30S.

THE TRUTH OF THE MATTER.

If you are in the early stages of your working life, the notion of retirement will no doubt seem like a hazy point on some distant horizon. Your ideas about retirement are probably shaped by your grandparents' golden years or maybe even your parents' if they have been lucky enough to reap the benefits of decades of labor and can comfortably transition out of their working lives. I have to tell you, your retirement will likely look very different than that of your parents and your grandparents. The concept of retirement in these days of the New American Dream is most definitely changing, no matter if you're in your 20s or your 60s. But even as I am asking you to let go of a.s.sumptions about your postwork life, I need you to understand that there is one absolute, bedrock ground rule that will not change, no matter what is happening in the economic climate: You must begin planning for retirement from your first day on the job. Do not squander precious time because you can't wrap your head around the concept of giving up money now for some theoretical notion of a life of leisure, half a century away. Let me show you why retirement planning needs to be a part of your agenda right here, right now.

The first truth to accept: You and you alone will be responsible for the quality of your life in retirement. If you think that the government, your employer, or any system currently in place is going to take care of you financially, you could not be more wrong if you tried. Let's start with what is going on at work. Thirty years ago, 62% of private companies that provided a retirement benefit did all the heavy lifting by giving employees an old-fashioned pension. Employees didn't have to save any money on their own, or figure out how to invest the money. The corporation did all that work and when you retired you were ent.i.tled to your pension. Simple as that.

Today, just 10% of private companies have only a pension as their retirement benefit. Instead, we've become a 401(k) nation: 63% of private-sector corporations that offer a retirement plan only offer a 401(k). Another 27% of employers offer a combo of a pension and 401(k). That means 9 out of 10 firms have shifted some or all responsibility for retirement planning onto your plate.

The story is a bit different in the public sector. Many government and munic.i.p.al employers do indeed offer an old-fashioned pension. But as if I have to point this out, federal, state, and local ent.i.ties are struggling to come to terms with some very serious budget shortfalls. And the ma.s.sive costs of providing old-fashioned pensions is a big expense that is coming under a lot of pressure. While pensions that have been promised to current workers will be honored, what we are already seeing is that new employees are increasingly being directed into a 401(k)-like plan rather than a pension, or are being asked to contribute a portion of their salary into the pension. The bottom line here is that even if you are a public-sector employee, chances are you too will soon be required to take more responsibility for your retirement security.

And it's not exactly a fun or easy task. Even if you appreciate the need to be saving today for your retirement security, I understand the scars that have been left by the financial crisis and bear market. Unlike your parents and grandparents, who have also lived through profitable bull markets, those of you in your 20s and 30s have no muscle memory of what it feels like when markets rise. Being told a secure future depends on staking a lot of money-your money-on a system that you don't have much faith or trust in is a tall order.

And let's talk about Social Security for a moment. There's actually some good news here. I know that many younger adults are convinced they will never see a penny from the system, given all the ominous talk about Social Security "going broke." That's just a lot of fearmongering. Please listen to me very carefully, for I want you to be in possession of the facts: If we don't do anything to "fix" Social Security before 2037, we will run into a situation in which the system cannot pay out 100% of the benefits that are promised today. But that does not mean the system will pay out zero either. The fact is, benefits would basically have to fall by about 25%. In other words, beneficiaries would get about 75% of the benefit they are being promised today. Granted, a 25% or so reduction isn't exactly cause for celebration, but it's a long way from nothing. And if Washington ever decides to get serious about "fixing" the problem, there are some very reasonable options that aren't nearly as dramatic or horrible as the fearmongers would have you think. Social Security is most definitely in need of tweaking, and yes, on some level those tweaks will effectively reduce the benefit you receive, but the benefit is not going to evaporate completely. Social Security will be there for you, though for some of you it may be at a reduced benefit from what is promised today.

But if you want to keep thinking Social Security won't be there for you, I see that as good news too. As much as I want you to understand what's really going on with Social Security, I am sort of glad you are skeptical about others providing for you in retirement. That should motivate you to get started on saving on your own. Let's agree, then, to think of Social Security as what it was always meant to be: a safety net. It will pay out something. For you, it will be a nice income stream to add to your own savings. A side dish, not the main course. Consider that the average benefit for a retiree today is about $1,200 a month. The average benefit when you retire will of course be much higher given the path of inflation, but if you are here in my cla.s.s we both know that the inflation-adjusted equivalent of $1,200 today in 40 or 50 years will not be the entire solution for your retirement dreams. So go right ahead, you have my full permission to a.s.sume Social Security isn't going to exist for you. That should be plenty of motivation to focus on your 401(k) and IRA.

All that said, I understand how easy it is to put retirement planning on the back burner, especially when it is decades away and there are more immediate priorities-like paying this month's bills. I know what you're thinking, because I've heard it before: You tell yourself that you'll just save more down the line when you're making more. If that is the kind of thinking you're indulging in, then you need to accept this truth: As you get older, saving for retirement becomes harder, not easier. This particular law of money is very simple: The more you make, the more you spend.

Just ask your parents, or an older friend or colleague. As you get older you will likely find yourself in the middle of a financial juggling act. Should your money go for the mortgage or the college fund you want to start for your young children? Speaking of college, you probably are still paying your student loans off. What about helping your parents, who have also been lousy at saving? And a vacation-you need a vacation-and new clothes! The list goes on and on-trust me, there will always be a long list of needs and wants competing for your dollars as you get older and your life gets more complicated.

Most of us, when we're young (and some of us when we're not so young ...), opt for the immediate gratification of spending, which knocks retirement saving down the list of our so-called priorities and then we find ourselves in a horrible bind. I've seen this happen time and again: Just as you make the turn into your 50s you suddenly wake up and realize the finish line is fast approaching. That's when the panic sets in. You realize that your years of neglect probably means you won't be able to retire when you want, with the money you need. You desperately try to make up for lost time, but your money is already committed elsewhere and long-held habits are hard to change. I implore you: Learn this lesson before it's too late. Retirement planning takes time and commitment-and it is never, never never too soon to start. That is more true now than it ever was before. too soon to start. That is more true now than it ever was before.

I happen to think that those of you in your 20s and 30s could be the big winners in the coming decades. You have just lived through some very unsettling times. We all have. But the big advantage you have is that you don't have big losses to make up for or years of mistakes to overcome. And you have a great deal of time to make your dreams into reality. Use your time wisely, stay strong and committed to living in the truth, and I am absolutely confident you can have everything you dream of.

I have organized this Retirement Cla.s.s into four lessons: - Time Is Your Greatest a.s.set - Retirement Accounts Explained - How Much You Need to Save for Retirement - Investing Your Retirement Money LESSON 1. TIME IS YOUR GREATEST a.s.sET TIME IS YOUR GREATEST a.s.sET.

The single biggest favor you can do for yourself right now is to start saving for retirement. When you are young you can take advantage of the one resource you have in abundance: time. The longer your money has to grow, the more money you will have when you reach retirement. I wasn't surprised to see a recent survey that asked people in their 50s what their biggest regret was when it came to retirement planning. The resounding answer: not starting earlier. Standing in your truth is often an exercise in imagining your life years from now and knowing you will be in a position to look back over your choices and say, "I am glad I did," rather than "I wish I hadn't." Please take the lead from those 50-year-olds who say they wish they hadn't waited so long to get serious about saving for retirement. Right now is when you write the script of your future. Commit to saving. You will be so glad you did. The fact is, the sooner you start, the less of your own hard-earned income you will need to put aside to reach your retirement dreams.

Let's say at age 25 you start saving $416 a month for retirement in a Roth IRA. That works out to $5,000 over the course of a year, which is currently the max annual contribution at your age. And let's a.s.sume you keep saving that $416 a month all the way until age 67 and your average annual rate of return is 6%. Why 67? Currently, that is the age at which you will be ent.i.tled to full Social Security benefits. If you were to start saving for retirement at age 25 under these terms, at age 67 you would have about $950,000 saved.

Now let's go with your theory that you can afford to wait and you start saving later on. Let's say you delay your retirement savings until age 45. If you invest the same $416 a month and earn the same average annualized 6% rate of return, you will have about $225,000 at age 67. The twenty years of lost time have cost you $725,000!

Another reason I want you to appreciate the value of getting started earlier is entwined with why I have used a 6% average annualized rate of return in the example I just ran through. Years ago, when I was first writing books for your parents, I used a 10% or 12% annualized rate of return, because in those times the economy and our markets were producing gains that strong. In fact, the long-term average annualized rate of return for U.S. stocks going back more than 80 years is right about 10%. But you and I are standing in the truth of what is real going forward, rather than wishing for what we would like to happen. And I think using a 6% annualized rate of return is an honest reflection of what a well-diversified portfolio might return in the coming years, based on the fact that our economy is not likely to grow as fast. So if we plan for lower returns, getting an early start on saving becomes even more important than ever. It's just another way you have to do more of the heavy lifting; when the markets were gaining 10% or 12% a year they did a lot of the "work" for you. At half that pace, your future retirement stash is going to rely more on what you manage to save.

Go to The Cla.s.sroom at www.suzeorman.com:To figure out what your retirement savings could be if you get started today and keep saving until you are ready to retire, use the Compound Interest Forecaster in The Cla.s.sroom at my website. Please stand in the truth and use an expected rate of return of no more than 6%.

LESSON 2. RETIREMENT ACCOUNTS EXPLAINED RETIREMENT ACCOUNTS EXPLAINED.

I want to make sure we are all on the same page about the different types of retirement accounts you can put money into in order to fulfill your dream of retirement. I have indeed covered these topics in great detail in prior books. If you are already up to speed on how 401(k)s, 403(b)s, and individual retirement accounts (IRAs) work, please jump ahead to the next lesson. For everyone else, here's a quick rundown of what you need to know: RETIREMENT PLANS OFFERED BY EMPLOYERS.

Many of us have access to a retirement plan at work. They have many different names, but essentially they all work in the same way. The most common workplace retirement plans are 401(k)s, 403(b)s, 457s, and the Thrift Savings Plan.

A 401(k) is offered by for-profit companies. A 403(b), also known as a tax-sheltered annuity (TSA), is a retirement plan for certain public-sector employees such as teachers, as well as some nonprofit workers. The 457 plans are offered to government employees and can also be used by nonprofits as well. The Thrift Savings Plan (TSP) is offered to federal civilian employees as well as members of the military.

The basic structure of all of these employer-based plans is similar: You contribute a portion of your salary into a personal retirement account held at your place of work. Some employers add a matching contribution and some do not.

In 2011, the maximum annual amount allowed by federal law that you may contribute to a 401(k) if you are under 50 is $16,500. (This amount is adjusted annually, when necessary, to keep pace with inflation. Check with your plan at the end of October to find out if the limit will be raised for the coming year.) Your employer has the right to set an even lower limit. For example, if your employer allows contributions equal to 10% of your salary, and you make $40,000, your contribution will be limited to $4,000.

Your contributions lower your taxable income. Money you invest in a company-sponsored retirement plan reduces your taxable income for that year. So, for example, if you make $60,000 and you put $10,000 into a 401(k), your taxable income drops to $50,000.

Your money grows tax-deferred while it is invested. You owe no tax as long as your money stays inside your retirement plan. That is, your money grows tax-deferred. There is a big difference between tax-deferred and tax-free, so I want to make sure you understand this completely. Tax-deferred means that you will eventually owe taxes on the money, just not now. Tax-free means you owe no tax. But make no mistake, the tax-deferred benefit is indeed valuable. Allowing your money to grow over decades without having to pay taxes each year is a big deal.

RETIREMENT PLAN WITHDRAWAL RULES.

Once your money is invested in a company retirement plan you will want to leave it untouched until you are at least 59. That's the age when the federal government says it's okay to start making withdrawals. If you want to withdraw money before that age you will have to pay a 10% early withdrawal penalty. (One exception is if you leave the employer where your 401(k) is and you turn 55 or older in the year you left service; in that case you can make withdrawals in any amount you want from that account without owing the 10% penalty. Please note, however, that this exception does not apply to IRAs.) Any money you withdraw from your traditional 401(k) will, however, be subject to ordinary income tax. Through the 2012 tax year, ordinary income tax rates range from 10% to 35%, based on your income.

Some employers now offer a Roth 401(k), in addition to a traditional 401(k). I explain Roth 401(k)s in greater detail later in this chapter.

NON-WORKPLACE RETIREMENT ACCOUNTS.

Whether you work for a company or not, you are eligible to contribute to an individual retirement account (IRA). There are two broad types of IRAs: traditional IRAs and Roth IRAs.

A traditional IRA works much like a 401(k). Based on your income, you may be able to make a tax-deductible contribution, and your IRA money grows tax-deferred while it is invested. When you make withdrawals in retirement you will pay income tax. Again, in most cases if you withdraw money before you reach age 59 you will owe a 10% penalty in addition to the regular income tax owed on all withdrawals. Please note that all traditional IRAs are eligible to be converted to a Roth.

In 2011 you can contribute up to $5,000 to an IRA if you are younger than 50. Married couples can contribute a total of $10,000, as long as at least one spouse has earned income of at least $10,000.

You can make a contribution to a deductible IRA if: - You have access to a retirement plan at work and your income is below $66,000 ($110,000 for married couples that file a joint tax return); - You don't have an employer-based retirement plan (there are no income limits in this case); or - One spouse has access to a employer-based retirement plan but your joint income is below $179,000.

NONDEDUCTIBLE IRAS.

If you do not meet the deductibility rules, you can still contribute to an IRA. The only difference is that your contributions will not be deductible, so you will not get a break on your income tax return for that year. But your investment earnings still get the same advantage of growing tax-deferred until you start making withdrawals in retirement.

ROTH IRAS.

If you have been following my advice for years, you are well aware that I think a Roth IRA is the best retirement account you can have.

A Roth IRA does not allow you to claim any tax deduction for your contributions. You invest money that has already been taxed (after-tax income). As a result, in retirement your withdrawals will be 100% tax-free-yes, tax-free tax-free, not tax-deferred. No income tax, no capital gains tax. As long as you wait until you are 59 to withdraw earnings on your original contributions and you have had the account for at least five years, there will be no tax on any of it. Your contributions can be withdrawn at any age, any time you want, without a penalty or income tax.

The ability to have tax-free income in retirement is the most compelling aspect of the Roth IRA. In the coming years I expect tax rates to rise. If that comes to pa.s.s, having tax-free income will become even more valuable.

Beyond the tax issue, the Roth IRA gives you other valuable benefits. There is no required minimum distribution (RMD) for a Roth IRA. If you do not need the money in a Roth when you're retired, you can leave the account untouched. With a traditional IRA, Uncle Sam insists that you begin to make withdrawals (RMDs, in IRS-speak) after you turn 70. A Roth can also be a backup emergency fund. Because your contributions are made with after-tax dollars, you are free to withdraw them (though not the earnings on them) at any age without incurring taxes or penalties. I want to be clear: Your goal should always be to leave every penny in your Roth IRA untouched until you retire. Your Roth should not take the place of an emergency fund, but it can serve as a backup in case your primary emergency fund isn't enough to cover your needs in a true emergency.

Roth contribution limits are the same as those of a traditional IRA: In 2011 you can contribute a maximum of $5,000 to a Roth IRA. Married couples can contribute a total of $10,000 (again-as long as at least one spouse has earned income of at least $10,000).

Anyone can invest in a Roth-2010 brought this welcome change in legislation. If you meet the income limits (see below), you can invest directly in a Roth. If your income exceeds the limits, I explain below how you can still benefit from having a Roth.

Income Limits for Direct Investment in a Roth IRA If you are single and your modified adjusted gross income (MAGI) is under $107,000 or if you are married and your joint income is below $169,000, you can invest directly in a Roth IRA up to the full annual limit. (For most of us, our MAGI is the same as our standard adjusted gross income [AGI] on our federal tax return. So what's AGI? It's all the money you made in a year-your income and earnings on taxable investments-minus certain deductions.) Reduced contributions are allowed for individuals with MAGI between $107,000 and $122,000 and married couples with joint MAGI between $169,000 and $179,000.

If your income is too high for a direct investment in a Roth IRA you can make a contribution to a nondeductible traditional IRA. Fairly simple paperwork is required to then convert that account to a Roth IRA. If this is the only IRA account you have and you make the conversion immediately you will likely owe no tax. However, if you have old IRAs, you may owe tax at the time you convert. I recommend you work with a trusted tax advisor if you have other IRA a.s.sets and you are considering a conversion, because the tax rules can be complicated. Your tax advisor can also show you how converting smaller sums over the years can be a smart option.

RETIREMENT PLANS FOR THE SELF-EMPLOYED.

If you are self-employed you have a few other options in addition to the traditional IRA and Roth IRA. A SEP-IRA allows you to make a tax-deductible contribution of as much as 25% of your income, up to a maximum of $49,000. A solo 401(k) and a SIMPLE IRA are other kinds of retirement plans for the self-employed.

Go to The Cla.s.sroom at www.suzeorman.com:For those of you who are self-employed, I encourage you to learn more at my website about the special retirement accounts you can invest in.

LESSON 3. HOW MUCH YOU NEED TO SAVE FOR RETIREMENT HOW MUCH YOU NEED TO SAVE FOR RETIREMENT.

Once again, as a first step, I'm going to begin by asking you to commit to living below your means. As I explained at the very beginning of this book, acceptance of this concept-wholly, with your head and your gut-is essential for creating your New American Dream, and it is particularly important when it comes to reaching your retirement goals. The reality is that you must find a way to save as much as possible today for your retirement, no matter how many years away it may be. Finding ways to reduce your expenses today will have a double payoff for you: First, you will free up money that can be redirected into retirement savings. Second, you will have trained yourself to live on less, so you will need less money in retirement to support your (less expensive) lifestyle.

Now that brings us to the two questions I am asked all the time: - How much do I need to save for retirement?

- Which retirement account is best for me?

THE RETIREMENT FORMULA.

The more you save today, the better. If you ask me, there is no such thing as putting away too much money. At a minimum I want you to figure out a way to set aside 15% of your pre-tax salary each and every year, starting as early as possible. If you wait until your 40s and 50s to get serious about saving, you will need to set aside 25% or more of your gross salary. Let's be honest: Playing catch-up at the rate of 25% of your salary is not likely something you will be able to do.

I know, I know. Fifteen percent of your salary today sounds like so much to give up. But it is in fact a solid rule of thumb to make sure the combination of your savings and your Social Security benefit will give you enough retirement income to match about 70% or so of your pre-retirement living expenses. Trust me on this one.

The Best 401(k) and IRA Strategy Now we're ready to learn how to make the most out of your retirement savings. The goal for most of you will be to have a mix of 401(k) and IRA savings. Here is a step-by-step strategy for how to save for retirement:

STEP 1. Save in a 401(k) plan if your employer offers a matching contribution. Contribute enough to qualify for the maximum company match.

More than 20% of workers don't contribute enough to earn the maximum their company offers to match. I don't care what other financial issues you are dealing with in your life-you must always always take advantage of a match when it is offered. That match is just like a bonus, and if you turn your back on this bonus it is literally throwing money away. take advantage of a match when it is offered. That match is just like a bonus, and if you turn your back on this bonus it is literally throwing money away.

Every company has its own method for calculating the match. A common formula is that your employer will give you 50 cents for every dollar you put into your 401(k), up to a limit of 6% of your salary. In other words, if you contribute 6%, your employer will kick in another 3%. Let's say your salary is $75,000. If you set aside 6% of your paycheck ($4,500) your employer would then contribute another $2,250. The employer match just boosted your account balance by 50%! That is a seriously great deal. And your 6% plus your employer's 3% gets you to a total retirement savings rate of 9%. That's more than halfway to our goal of 15%.

Please check with your employer to make sure that you are in fact investing enough to qualify for the maximum company match. I have to warn you that an odd quirk in how 401(k) plans are set up for new employees means that many of you may be inadvertently contributing too little to get the full bonus matching contribution you are ent.i.tled to.

A few years ago many employers switched to a new system that automatically enrolls all new employees in the 401(k) when they are hired. That is, rather than asking you if you want to join the plan, or waiting for you to sign the paperwork to start your retirement saving, the employer just automatically puts you in the plan. You can always choose to opt out after the fact, but the system is now set up to a.s.sume you want to be in the plan from the get-go. That is indeed a fabulous improvement in how our 401(k)s work; it means more people will start saving at a younger age. But there's a kink that needs to be worked out. When most employers automatically enroll a new employee in the 401(k) they set your contribution rate at 3% of your salary. Why so low? Well, the theory is that they don't want to scare you away by setting this "default contribution rate" any higher.

You are being led into a costly mistake. As I just explained, many employers will match your contributions up to the first 6% of your salary, up to a set dollar limit. So if you are only contributing 3% because that's what they set it at when they enrolled you, there's a chance you may not be capturing all of the company match you are ent.i.tled to. Give HR a call and make sure you are indeed contributing at a level that guarantees your account will have the maximum employer match added to it.

A word on vesting: The money you contribute to your 401(k) is 100% yours from the moment you make the contribution. But the money your employer contributes to your account typically becomes yours over time. For example, some firms have a three-year vesting formula. After the first year, one-third of the matching contribution becomes yours; after two years another third vests; and at the end of the third year all of the match is 100% yours-that is, you are fully vested. So if you left the company after one year-voluntarily or not-you would be ent.i.tled to keep one-third of the match, after two years you would keep two-thirds, and after three years all of the match would be yours. The money you contribute to your 401(k) is 100% yours from the moment you make the contribution. But the money your employer contributes to your account typically becomes yours over time. For example, some firms have a three-year vesting formula. After the first year, one-third of the matching contribution becomes yours; after two years another third vests; and at the end of the third year all of the match is 100% yours-that is, you are fully vested. So if you left the company after one year-voluntarily or not-you would be ent.i.tled to keep one-third of the match, after two years you would keep two-thirds, and after three years all of the match would be yours.

Opt for a Roth 401(k) if it is offered as part of your plan. A growing number of companies now offer the option of contributing to a traditional or a Roth 401(k). If your plan has a Roth 401(k), it is probably the best choice.

A Roth 401(k) is a cousin to the Roth IRA described earlier in this chapter. The money you use to make your contribution comes out of your paycheck after taxes have been taken out. So there is no up-front tax break on your contributions as there is with a regular 401(k), but once again, the big payoff comes in retirement. Withdrawals from a Roth 401(k) after the age of 59 are 100% tax-free, whereas withdrawals from your regular 401(k) plan will always be taxed as ordinary income. It's my belief that the ability to have tax-free income in retirement is a smart move, regardless of what happens to tax rates in the future. The Roth 401(k) also gives you a lot more flexibility if you intend to leave money to heirs. Once you reach age 70 the federal government insists that you start to take money out of a regular 401(k) if you are no longer working; this is what is called a required minimum distribution (RMD). With a Roth 401(k) there is no RMD; you can just let it grow for future generations. And when your beneficiaries inherit your Roth 401(k) they too will be able to withdraw this money tax-free.

STEP 2. Contribute to a Roth IRA.

Once you have contributed enough to your 401(k) to earn the maximum company matching contribution, or if there is no match available, your goal should be to fund your own Roth IRA.

Caveat for those of you with a Roth 401(k): If you are contributing to a Roth 401(k) you could in fact skip this step on Roth IRAs. You could just keep contributing more to your Roth 401(k), above what you need to invest to get the company match. Remember, in most instances you can invest up to $16,500 in a Roth 401(k) in 2011 if you are under age 50. And indeed, if you want to keep things simple, it's fine to focus all your money and attention on your Roth 401(k). The most important thing here is that you are indeed saving up. But if you want to get an A in this cla.s.s, I think you should consider opening a Roth IRA even if you have a Roth 401(k). With a Roth IRA you have the freedom to invest in thousands of low-cost investments, including exchange traded funds (ETFs), rather than be limited to the choices offered within your 401(k) plan. And even though I never want you to touch your retirement savings before retirement, the fact that you can take out money that you have contributed to a Roth IRA-though not the earnings-at any time without tax or penalty means it can moonlight as a backup emergency fund. So once you get the maximum match from your employer in a Roth 401(k), my advice is to then focus on a Roth IRA. If you are contributing to a Roth 401(k) you could in fact skip this step on Roth IRAs. You could just keep contributing more to your Roth 401(k), above what you need to invest to get the company match. Remember, in most instances you can invest up to $16,500 in a Roth 401(k) in 2011 if you are under age 50. And indeed, if you want to keep things simple, it's fine to focus all your money and attention on your Roth 401(k). The most important thing here is that you are indeed saving up. But if you want to get an A in this cla.s.s, I think you should consider opening a Roth IRA even if you have a Roth 401(k). With a Roth IRA you have the freedom to invest in thousands of low-cost investments, including exchange traded funds (ETFs), rather than be limited to the choices offered within your 401(k) plan. And even though I never want you to touch your retirement savings before retirement, the fact that you can take out money that you have contributed to a Roth IRA-though not the earnings-at any time without tax or penalty means it can moonlight as a backup emergency fund. So once you get the maximum match from your employer in a Roth 401(k), my advice is to then focus on a Roth IRA.

ALTERNATIVE STEP 2. Contribute to a Traditional Nondeductible IRA and Convert to a Roth IRA.

As I explained above, if your income disqualifies you for direct investment in a Roth IRA, you have a two-step option: Make a nondeductible contribution to a traditional IRA and then convert that IRA into a Roth IRA. If you have other IRA funds please work with a tax advisor before you make this move; the tax rules are tricky and you don't want to have any ugly surprises.

Go to The Cla.s.sroom at www.suzeorman.com:On my website I explain the tax rules for Roth IRA conversions.

How much to invest in your Roth IRA? Remember what I said earlier: The more you save for retirement today, the better your chances of reaching your retirement dreams. The annual maximum you can contribute in 2011 is $5,000. Make that your goal. What you can afford to save is of course a function of your current salary and your other financial obligations. But please stop here for a moment and seriously stand in your truth. Your future retirement success is rooted in the savings choices you make today. I want you to summon the lesson we discussed in Cla.s.s 2: You are standing in the truth when the pleasure of saving equals the pleasure of spending. Saving for retirement is your most important savings goal. Remember what I said earlier: The more you save for retirement today, the better your chances of reaching your retirement dreams. The annual maximum you can contribute in 2011 is $5,000. Make that your goal. What you can afford to save is of course a function of your current salary and your other financial obligations. But please stop here for a moment and seriously stand in your truth. Your future retirement success is rooted in the savings choices you make today. I want you to summon the lesson we discussed in Cla.s.s 2: You are standing in the truth when the pleasure of saving equals the pleasure of spending. Saving for retirement is your most important savings goal.

Now, if you happen to have a big pile of cash ready to contribute to an IRA, that's great. But what's more likely is that contributing smaller sums throughout the year will be more practical. Here's what you would want to save on a monthly or quarterly basis to reach the maximum annual IRA contribution limit:

IRA PERIODIC INVESTMENT TABLE.

If you are 49 or younger MONTHLY CONTRIBUTION TO MEET ANNUAL MAXIMUM*

QUARTERLY CONTRIBUTION TO MEET ANNUAL MAXIMUM QUARTERLY CONTRIBUTION TO MEET ANNUAL MAXIMUM*

$416.65.

$1,250 $1,250.

* *In 2011 the maximum annual contribution limit is $5,000 for individuals below age 50.