QuickOverview

Gone are the days that you can join your company, stay there until age 65, retire and collect plenty of money from Social Security and the company pension. Today, workers stay at each job for an average of less than five years. The 401K program has replaced the company pension plan and who knows what will happen to social security in the future.

Investment advisors charge a fortune in direct or hidden fees and will make you believe that investing is so complicated that you can't do it by yourself. However, there is a simple, intelligent, plan you can follow that may very well perform better than any investment planners' advice simply because of lower costs.

There are numerous strategies you can use to save for retirement. The ones described here are in overview form. You are encouraged to use the simple guides here as a start and gradually learn more about various investment vehicles so that you can become gradually more sophisticated. The younger you are when you start, the more likely it is that you will succeed in ensuring an comfortable retirement.

Here are some topics for your to consider.

Avoid Taxes Whenever Possible

There are numerous ways for you to invest your retirement money tax free that you should take advantage of. If you are not taxed on the money you set aside for investment, it has an exponential effect on your investment return.

If your company offers you a 401K program, that is probably your best bet for retirnement. The money you contribute is tax free, and many companies actually match part of your donations, so you end up investing a lot more than you would had you taken the income and invested outside of the program. When you switch companies, it is generally a good idea to transfer your entire 401K program to your new company. The previous company will want to keep your money, but it can be complex to have numerous 401K accounts to keep track of, and your current employer will be more responsive to your questions. The only thing to watch out in 401K programs is to make sure that the fees for your investments are not out of hand. There is a maximum amount you can invest in your 401K account yearly, and that amount changes from year to year. It is suggested that you contribute as much as you can afford into your 401K account, even if that means you can't invest elsewhere for retirement. Besides taking a loan out of your 401K, or certain exceptions like buying your first home, you can't withdraw the money out of your 401K until convert it into an IRA after age 60.

Even if your company does not offer a 401K, you can still join the tax savings party. Depending on income and eligibility restrictions, you can participate in an IRA or Roth IRA. An IRA allows you to create an account with any brokerage house and deduct the contribution from your taxable income for that year. Similar to a 401K, you can take the money from an IRA when you reach age 60, with a few exceptions. Alternatively, a Roth IRA allows you to contribute after tax dollars into an account, but that money can grow tax free thereafter. Another advantage of a Roth IRA is that you can take the money out before you are 60.

If you are self employed, you can also have a SEP IRA, which has a higher limit of contribution.

It is a good idea to consult with your accountant or IRS enrolled agent to discuss tax saving investment ideas. Even if you do your own taxes, programs such as Intuit TurboTax will give you guidance in retirement investement options for your situation.

Choose an Investment Company Wisely

Investment companies range wildly in services offered and fees charged. You should be very careful when choosing an investment company because fees are usually charged behind the scenes. In other words, your advisor won't charge you, but the investments he suggests will automatically deduct the fees and will induce lower returns.

This author highly recommends Charles Schwab. They are at the expensive end of the discount brokerages, but their service is excellent and the range of investment vehicles they offer is impressive. Vanguard is mostly just a service for buying their own mutual funds, but it has ultra low fees and offer enough funds that will suffice for most investors, so they are also an excellent choice. E-Trade offers a bit less service than Schwab, but their fees are lower, so they may be a good choice if you plan on trading frequently.

There are numerous other good investment companies that would be appropriate as well. Just make sure you know how they collect the fees. Smith Barney, Goldman Sachs, Prudential will wine and dine you, but you will pay a fortune in fees. They may be a good idea for the ultra rich, but not for most investors.

Know How to Diversify

Staying diversified is much easier in this age of mutual funds. The first area of diversification you should consider is how much money you have invested in bonds versus how much you have in stocks. Then you must ensure that you are diversified within the bonds and stocks categories. This will ensure you are not susceptible to wild swings in your net asset value and that you don't take on too much risk in your investments.

Let's discuss how much you should have in bonds versus stocks. One good rule of thumb is to subract your age from 100 and that should be the percentage you should have in stocks. For example, if you are 35 years old, you could divide your investments as 65% stocks and 35% bonds. When you are 45 years old, you could have 55% stocks and 45% bonds. If you want to be an aggressive investor, you can bump up the stock allocation up to 10% higher than the formula yields.

There are mutual funds that make it very easy to choose investments for each of your stock and bond allocations. For example, the Schwab MarketTrack All Equity is a great, low cost, mutual fund that will broadly invest in the entire United States Stock Market. The Vanguard Total Stock Market fund works in much the same way. As for the bonds portion of your investments, you can try funds like the Schwab Total Bond Market Fund.

It may sound a bit too easy, but a 35 year old that invests 75% of their money in the Schwab MarketTrack All Equity fund and 25% in the Schwab Total Bond Market fund is in great shape with just those two investments. She is well diversified for her age, is paying very low fees, and should enjoy generous long term stock market returns during the rest of her life.

Whole Life Insurance - Stay Away!

Plenty of insurance agents will try to sell you Whole Life Insurance as a combination of life insurance and retirement investment. The only one who benefits is the salesman as these policies generally have huge costs and restrictions, and investors would be better off buying term life insurance instead and investing what they save in premiums.

Related Sites

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