Ah, retirement. That point in our life where we can sit back, go fishing, travel, be with the grandkids, and enjoy the fruits of our labor. Unfortunately, some people will go into retirement with less than $10,000 socked away, others will have to keep working, and then there are those retirees who have to move in with family to cut down on expenses. But just how do those lucky souls in their golden years who have enough money to quit working and not have to rely on their family for financial support? They started as early as they could and put away as much as they could.

First, you gotta invest and save a portion of your earnings before you pay your regular bills. The best way for most people is to sign up for their employers 401K plan. The money grows tax-deferred, you get an immediate tax deduction and, in many cases, your employers will match a portion of it (in some cases, 50%). For example, let's say your gross salary is $40,000 and you contribute 10% of it, which comes out to $4,000. Your gross income has just got knocked down to $36,000, yes, but that means your in a lower tax bracket. You already knocked off $4000 in taxes! This money in your 401K can't be taken out until the age of 59 and a half as you'll get an immediate 10% penalty plus you're taxed on the earnings.

Now that we know (and hopefully will!) sock away at least 10% of our earnings into our 401K, we must determine where to invest to money to get the most bang for our buck. Currently, you can contribute up to is $15,000 (but the laws and contribution laws are subject to change) My suggestion is the stock market, such as an index fund or a good, well-managed sector fund. Historically, and on average, your money will grow 10% a year over the long haul. For example, if you're socking away $4,000 growing at 10%, in 20 years that comes out to about $252,000. Also, let's say your employer matched 50%. That means instead of being worth $252,000, it'd be worth $800,000!

You also want to have an emergency fund. This means 6 months of liquid cash, such as a savings account or money market. This emergency fund should only be used to pay bills if you get fired, can't work, quit your job, a large car repair bill, or have a serious illness or injury that insurance won't cover. This money you put into your emergency fund will be with after tax dollars, unlike your 401K.

If you're self-employed or if you earn freelance or independent contractor-type income on the side, there's something out there for you called SEP-IRA and you can contribute up to $46,000 as of 2008. So, for example, say you did some freelance work painting houses and you earned $10,000. If you funded that entire amount into the stock market, along with your 401K at your job, you'd probably have at least an extra couple $100,000, assuming the market grows at 10% a year.

Now that you've gotten the information, the choice is yours. You can either be working away in your retirement years because you need to work, or you can start now by planning for your financial future. It's up to you.

Learn more about this author, Matt Newcomb.
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