Investing for Retirement
First, let's take a look at the basic choices available to you:
- Savings accounts and money market mutual funds. These are sometimes referred
to as cash or cash equivalents because you can get to them quickly and there's little
risk of losing the money you invest.
- Certificates of Deposit and U.S. Treasury bills. You loan money to a bank
or the U.S. government for a specified period. These types of investments often
pay attractive interest rates and usually involve low risk of your principal.
- Mutual funds. Instead of investing directly in stocks or bonds, you invest
in a fund that pools your money with that of other shareholders and invests it for
- Domestic stocks. You own part of a U.S. company.
- Domestic bonds. You loan money to a U.S. company or a government body in
return for its promise to pay back with interest the money you loaned.
For any goals that are short-term -- five years or less -- a good rule of thumb
is to keep your money in cash equivalent investments. For longer-term goals like
retirement, you may want to put your money in stocks, bonds, real estate, foreign
investments, mutual funds or other assets.
Of course, these potentially higher-yielding investments do involve greater risk.
But, depending on the type of investment, the amount of time you have to invest,
and the investment strategy you choose, your risk can be reduced while you earn
higher returns over time.
Generally, to reduce risk you will probably want to diversify within each category
of investment you choose by investing in pooled arrangements such as
mutual funds, index funds, and bank products. You may also want to reduce risk by
diversifying among different categories of investments. A smart
strategy for many of us would be to put some money in cash, some in bonds and stocks,
and some in other investment vehicles.
When you diversify you spread your money among different investments or categories,
allowing you to reduce your risk. For example, if you choose a mutual fund that
only invests in stocks, any losses in one stock might be offset by gains from another.
And, since stock prices generally go down when bond prices go up, diversifying among
both types of investments should help offset any losses in one category by gains
How you diversify -- deciding how much money to put into each type of investment
-- is called asset allocation. For example, what percentage
of your retirement funds should you place in stocks, how much in bonds, and how
much in cash or cash equivalents? Your decision should be based on many factors
including the time you have until retirement, how long you expect to live, the size
of your current retirement nest egg, other sources of retirement income, how much
risk you're willing to take, and the health of your current financial picture. Again,
you may want to seek the help of a financial planner or investment firm to guide
you in your choices.
There's one more thing to consider. The longer you invest, the more your money earns
through the power of compounding. For example, for every
10 years you delay before starting to invest for retirement, you may need to save
up to three times as much each month to catch up. So, the sooner you begin saving
for retirement, the better off you will be.
Of course, one of the best places for your retirement nest egg is Your Employer's
But, what if you don't have a plan at work? You can open an IRA which allows you to put up to $5,000 in 2008, $6,000 if you are age 50 or older, a year into your account on a tax-deductible basis if your spouse isn't covered by a retirement plan at work and as long as your combined incomes aren't too high.
You may also want to consider an annuity. When you invest in an annuity, you pay
money to an insurance company in return for an agreement to pay either a regular
fixed amount when you retire or an amount based on how much your investment earns.
There is no limit to how much you can invest in an annuity and your earnings aren't
taxed until you withdraw them. Annuities do present, however, some complexities
regarding taxes, fees, and withdrawal strategies, so you may want to discuss your
options with a financial planner or professional investment firm.
If you're self-employed or own any business with one or more employees, establishing
your own plan may be the best idea
About Your Employer's Retirement Plan...