Saving for Retirement: The 5 Basic Principles

The health care debate isn't the only thing in the news these days. In a recent radio address, President Obama talking about retirement savings and how people can best prepare for the future. The Obama plan has two pretty significant proposals that will help people save who might be avoiding the issue.

In the Obama proposal, employees will be able to add unused sick days and vacation days into a retirement account--something that's normally lost if remained unused. Another proposal is to allow people to deposit their tax refund into savings bonds. This is a kind of forced savings proposal because you can't borrow off a savings bond for five years without a penalty, meaning those savings will be locked tight from people who don't have the willpower.

Now that tried and true investments are not as solid as they used to be, and people lost a significant amount of value in 401(k)s and other investments, retirees need to look into other areas. What it comes down to is that good old-fashioned saving is more important than ever.

Here are some of the basic steps you should take and how the new national initiatives should help people struggling to save.

1. Determine your needs. Retiring is somewhat like buying a house - you need to determine how much you need to save every month compared to how much you're paying out to debt and other expenses. Social Security is normally 40% of what you earned when employed, so if you're living only on Social Security, you will no doubt have to cut corners.

2. Take care of that debt. One of the worst mistakes that people make is taking debt into retirement - especially high-interest credit card debt. It's a self-fulfilling prophecy: savings get swallowed up by interest, leading to people having to put more and more money on credit cards, increasing the debt. People should always be looking to get out of debt, but this is especially important 10-15 years before retirement to make sure you're debt free--or close to it--when you retire.

3. Save early and often. Consider your cash savings your safety net, not your "income." It's not something you should be living off of day to day because you'll go through this very quickly (depending on the amount of savings), especially if you have unforeseen and costly medical problems which are more common as you get older.

4. Invest wisely. Right now you have to be even more careful than the past. Again, invest early, because you want to give time for long-term investments to earn their ROI (Return on Investment). Additionally: diversify with both long-term and short-term investment prospects. You absolutely don't want to invest from a place of panic because this could mean losing more money.

5. Invest in a tax-sheltered IRA account. There are two options: the traditional IRA and the Roth IRA, which will have different terms depending on how much you deposit and how often or early you withdraw from the account. Again, starting early is your best bet.

Certainly, it's great to have a savings account with a matching fund like a 401(k) but unfortunately these types of retirement accounts are susceptible to movements in the economy. Straight savings and debt repayment should be a part of everyone's retirement plan.

The main retirement principle is, indeed, willpower; you have to think about it seriously and you have to think about it well in advance. This even applies to people in their twenties, because if you're accruing massive credit card debt, student loans, and other debts, this is possibly going to stay with you for many years to come, making it that much harder to save.

How are you going about saving for retirement and how early did you start? Let us know in the comments.