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Jim Lentini: Pay yourself first in the new year

Posted: December 29, 2008 7:10 p.m.
Updated: December 30, 2008 4:30 a.m.

I do believe most of us are ready for 2008 to end and see some better New Year's resolutions in 2009, especially from our financial markets. Everyone I know is tired of seeing their 401(k) plan look like a 201(k).

There is a lesson to be learned from today's economy: You can't expect your investment earnings to get you to your retirement goals alone. You need to save as well as invest, and not saving enough can significantly impact your long-term financial security.

It isn't always easy to set aside money for retirement when you are just trying to pay your regular bills, but you have everything to gain by devising a plan that lets you "pay yourself first."

How much should you be saving?
First, before focusing on a long-term strategy, protect yourself in the near term by making sure you have sufficient savings in an emergency cash fund.

A general guideline is to keep at least three to six months worth of expenses in a liquid account, such as a money market fund.

The current financial crisis has changed the savings rate of Americans from about 1-percent for the last few years according to the U.S. Bureau of Economic Analysis.

In 2008 we are seeing more savings due to the dwindling values in investment accounts. Financial experts recommend that you seek to replace at least 80 percent of your pre-retirement income.

Getting started
The objective is to save as much as you can, starting as soon as you can.

The ideal situation would be to save as much as 10 percent of your annual income when you are in your younger years and maybe even more if you have no dependents or are in your peak earning years. With increasing prices and health care, there may be little disposable income remaining to set aside for the future.

But even if you can't reach the ideal savings rate right away, the key is to just get started.

Retirement savings with discipline
The government encourages you to save for the future by giving you tax breaks that are unavailable with many other types of investments.

Your employer's retirement plan, your own IRA, both give you the ability to contribute to your plan on a pre-tax basis and tax deferral of your earnings. Investing pre-tax dollars helps to lower your current income, which means you can set aside money for your retirement that you otherwise might have paid in taxes.

So, in closing out 2008 and preparing for 2009, the best New Year's resolution would be to get together with your financial advisor to discuss how best to plan a strategy to overcome our losses and lessons learned this past year.

Remember, "no one plans to fail; only some fail to plan."

Happy New Year!

Jim Lentini is president of Lentini Insurance & Investments, Inc., located in Santa Clarita. His column reflects his own views and not necessarily those of The Signal.


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