Saving for Retirement
The most important thing to know about saving for retirement is that you should do it early – no matter how small the amount. The time value of multiple years of interest over your natural working lifespan will generate a surprisingly large sum of money when you are ready to retire.
The next best thing to know is that if you save for retirement under the umbrella of tax deferred IRA or 401k savings plan, you will earn interest on the deferred federal taxes. Also, when you do finally pay the tax (upon withdrawal when you are retired), there is a good chance you will be in a lower tax bracket and therefore pay less taxes. You can open an IRA (Individual Retirement Account) as an individual –- provided you have taxable income. You don’t need your employer to create a plan that you can join. Many employers do, however, have employee 401k savings plans, that allow you to say a certain portion of your salary each month. In many cases, the employer will also match your contribution typically up to 6%. If you don’t take advantage of these plans, you are literally throwing money away.
Ok, so you are going to save for retirement and you will save under a tax deferred IRA or 401k. The next question is what type of investment should I invest in – stocks, bonds, high yield money market?
The most typical advice you will hear is that if you are young, allocate a larger percent of your savings into stocks – perhaps, 70-90%. Don’t invest in single stocks because it is too risky of that company does poorly or goes bankrupt. Instead, invest in a portfolio of stocks such as an S%P 500 index fund – typically offered in all employer 401k funds and also available from large investment firms such as Fidelity Investments, Vanguard, Charles Schwab, T. Rowe Price. Make sure you invest in an IRA to take advantage of earnings on the deferred federal taxes. Invest the other 10-30% of your savings in more liquid (immediately available with no loss of original investment) funds like intermediate bond funds or US Treasuries (also typically available for purchase on major investment firms). Bonds can also be bought through bond funds made up of the bonds of multiple companies in order to reduce the risk of an individual company failure. Bond funds are typically sold as short term (1-3 years), intermediate (4-6 years) or long term funds (7+ years). Some state or municipal bond funds are also designed to offer immunity from state or local taxes as the underlying companies are typically cities or states that can exempt you from local income taxes. Whether you invest in stock or bond funds, make sure you read the fund’s prospectus, which describes the objectives, types of investments, management fees and risks.
As you get older, move your savings to a more liquid investment like bonds and US Treasuries. A good rule of thumb is approximately, 60% stock / 40% bonds by the time you retire. You’ll need to start spending some of this money once you no longer are working and receiving a pay check. After retirement as you approach your golden years, higher liquid percentage is typically recommended since your fund balance is low and you normally need the money sooner.
So, these are some initial thoughts and strategies to give you foundation for exploring more on your own. Hopefully, you found them useful and can put them to use to improve your family’s financial future