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Protect Your Retirement New Study Discusses Spending vs Saving ina...

In terms of financial disciplines, saving and investing are frequently lumped into the same category. But some experts say they are very different disciplines. Understanding the differences between the two is the key to future financial security according to a new study.

The relationship between saving and investing is critical. When an individual fails to save, then he or she has no resources to invest. Saving is the art of building a strong foundation for our personal financial structure, according to financial expert Tom Marshall, President of Virginia Estate and Retirement Planning Advisors, Inc. It is the discipline to control spending in order to allow for money to be set aside for future needs.

Here'ss the key: Investing is putting savings to work. Unlike saving, which requires only the will power to set aside a portion of each paycheck for the future, investing is a more complicated task. It involves knowing the various investment products available on the market and which ones match a particular financial objective (buying a house, funding a college education or early retirement).

It also requires understanding one'ss investment horizon and risk tolerance. Whereas saving is a do-it-and-forget-it deal, investments must be regularly monitored and adjusted to ensure maximum growth and minimize losses.

Don'st Forget: There are many rules of thumb when it comes to allocating money for saving and investing. Many personal financial experts recommend systematically putting away a specified amount -- a dollar amount or a percentage of income -- every month or each pay period, even before paying bills, taxes and deductions. This strategy is commonly known as the Pay Yourself First approach and often suggests starting with 10 percent of your gross salary to be earmarked for saving and investing. But the most effective version requires 30 percent.

The first 10 percent should be placed in liquid accounts (short-term savings). This should be the top priority and should be maintained at a level equal to at least three months of take-home salary. Short-term savings are for emergencies, vacations and other expenses that people usually put on credit. Another 10 percent should go into IRAs, 401(k)s or other retirement vehicles, and the remaining portion should be set aside for investing.

But even the 10%-10%-10% strategy is called a good starting point. In fact, most people need to set aside at least 15 percent of their pretax salary for their investments to replace 50 percent or more of their current salary in retirement, according to one study. And that is based on the assumption that Social Security and pension payouts will provide an extra 20 percent or more of their pre-retirement income.

Ultimately, the best allocation strategy for financial security and growth depends on the individual'ss unique situation.

Thomas P. Marshall is President of Virginia Estate and Retirement Planning Advisors, Inc., a Fee-Based Financial Planning and Investment Management Firm with offices in Richmond, Newport News, and Fredericksburg Virginia. ( http://myverpa.blogspot.com or www.myverpa.com ) Tom can be reached at 800-279-3768.

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