The Importance of Saving (Part I)

Click here for Part 2 of this piece.

NEW YORK ( TheStreet) -- Are you saving? Seriously, when that day comes where you can walk out of your last day of work, get in the car and go home, will you finally be able to rest easy or will you be burdened by the thought of running out of money?

With significant advances in health care, we are seeing our longevity increase by much more than we might have planned or thought. We (especially the younger generation) can't count on Social Security to finance our living after we leave the workforce either. Furthermore, once we do, we don't want to live paycheck to paycheck, just scraping by.

Hell, no. We want to enjoy our retirement. Go out to eat, take a vacation and treat the grandkids whenever we feel like it. But as you know, this lifestyle doesn't come without hard work, planning and sacrifice. The earlier one can start saving, the more money you'll end up with when retirement comes knocking.

But what if you're self-employed? Or if your employer doesn't offer a 401(k)? If available, the obvious choice for saving is to take advantage of a plan that offers some form of matching benefits. In this type of scenario, for every dollar you contribute, your employer will usually contribute a certain amount, too, up to a point.

Sometimes it's 50 cents on the dollar. Other times it's dollar for dollar. Truly fortunate individuals work for employers that offer more than that, such as two dollars for every one dollar that you contribute. Of course, there is an employer limit, such as $10,000 per year. But this is still an excellent way to save your money.

If you're looking to self-manage money for retirement and are looking for the best way to do to it, perhaps this article will lend you a hand. Specifically, I want to look at individual retirement accounts, or IRAs. There are two different types of IRAs: Roth IRAs and traditional IRAs.

These accounts are subject to income restrictions. There are also several differences between the two (a quick Google search can provide some answers) but the main one is this: With a Roth account, you deposit taxed income up front, but don't pay taxes when you withdraw it. In a traditional IRA you deposit pre-taxed income into the account, but you must withdraw once you reach the age of 70 1/2 and at that point it is taxed.

If you qualify, these can be excellent ways to self­-manage your money and avoid as many fees and taxes as possible. For this scenario, I'm going to look at the Roth IRA for a person with 30 years to go before retirement.

I want to create a scenario here so that it may help you when you're trying to gauge your own situation. Let's assume our worker is single and will retire at age 59-1/2, the age at which you can start withdrawing from your Roth IRA without penalty or tax.

Let's also assume our individual in this example is 30 years old, giving her nearly 30 years to save. For our scenario, we'll say she makes $50,000 per year through her 30s, $60,000 through her 40s and $70,000 through her 50s.

While this may not be an overwhelming amount of money, this individual can make the money go very far by saving as little as 15% of it along the way.

The first thing to remember is rather simple: Everyone is different. I chose a single, 30-year-old working adult because I'm focusing on individual retirement accounts. Plus, it's the most basic way to do this example.

If you're married, the rules are slightly different. Depending on the income, the couple may or may not qualify for IRA contributions, which is also determined by how they file their taxes (individually or jointly). The tax rates could be different on the income, again depending on the filing.

So while everyone's scenario might be different, the general philosophy of this article will remain the same: saving. So sticking with our example, I'm going to show how much money our individual will have after taxes are applied. I will assume she receives no tax refund or falls under any other "special" circumstances. Also, while the current 2013 tax rate would charge our individual 25% on her income, I will remove 28%, in an attempt to account for potential increases in the future.

Through her 30s, our individual who makes $50,000 annually will take home $36,000. Through her 40s, our individual who makes $60,000 annually will take home $43,200. Through her 50s, our individual who makes $70,000 annually will take home $50,400.

Based on these figures, we will attempt to shape the IRA contributions. Right now, the highest contribution for savers under the age of 50 is $5,500 per year. Hopefully, through her 20s our individual has saved $5,500 that she can deposit into her brand-new Roth IRA. Because of how contributions work, you can actually make deposits into your Roth for the previous calendar year, up until mid-April of the current year.

That may seem a little confusing. Basically, if it's March 2013, for example, you can make up to $5,500 in deposits to your Roth IRA for 2012, while still being able to contribute the full $5,500 for 2013 as well. Essentially, it opens your savings window to 16 months rather than 12.

To see how our guinea pig investor does on her long-term savings goals, read part II of this article. The results are fascinating!

Also, check out MainStreet's IRA page for more tips and ideas on saving.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

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