Don’t Let Your Paycheck Limit You

It's your financial strategy that determines how well you build personal wealth

In addition to their retirement plans at work, the Bells own mutual funds and individual stocks. Sam started investing in REITs (real estate investment trusts) when he graduated from high school in 1985 and entered the Navy. Since the military paid for all of his expenses (e.g., food, clothing, and shelter), he followed the advice of an officer and invested his money (an $850 monthly stipend) during his eight years of service.

  • Develop a plan to retire rich. No one wants to postpone retirement because of meager finances. Figure out the annual income you will need to support your lifestyle (factor in such variables as healthcare). Multiply your current income by the rate of inflation (e.g., two times current wages in 25 years). Take into account Social Security and any projected pension. “If we continue to invest in stocks at the same rate, given moderate inflation, we plan to have more than $2 million by the time we retire,” says Sam.
  • Max out your tax-deferred retirement vehicles. If you have a 401(k) or 403(b) plan, at least contribute the maximum amount your company is willing to match, says Ray Allen, vice president and senior portfolio manager with Bank of America Private Investors in St. Louis. From there, he adds, take a look at a Roth IRA and contribute $2,000 a year to it for as long as you can. Single individuals can’t earn more than $110,000). A Roth IRA is not deductible, but it provides tax-free income after age 591/2.
  • Allocate your assets according to age. The longer your time horizon, the more aggressive you can be. “Anyone under age 50 should have 80% of their income invested in the stock market,” Allen says. But this doesn’t mean you should tie up all of your money in company stock. “Even the best companies tumble–take Lucent Technologies, which went from $65 [a share] to $5 a share.” In other words, diversify your holdings. As you get closer to retirement age, shift your portfolio to more fixed-income investments.
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