Many people spend their lives working, counting down the days until they can enjoy the sweet rewards of retirement. But retirement brings with it many financial concerns as weekly wages give way to limited incomes and social security benefits.
According to psca.org, most people will need to maintain 70% of their pre-retirement income in order to maintain the standard of living they are accustomed to. And, since social security only provides an estimated 40% of this income, the remainder must come from another source of funds.
The exact amount of social security is based upon the rate of contribution during an individual’s working years and the age of retirement. The Social Security Administration developed a calculator to help provide estimates.
But there are other forms of safe retirement investments that can be excellent sources of income in later years. Let’s walk through the advantages and disadvantages of each:
Fixed Income Investments
Many people often refer to the limited discretionary income of social security as a fixed income. And although this is true as the amount is set based upon several factors including life-time contribution amounts, fixed income investments are actually investment products that help individuals save for retirement. They include bonds, bond mutual funds, CDs and money market funds.
These low risk investment strategies provide a return in the form of fixed, periodic payments and the eventual return of the principal at maturity.
PROS: Provides a reliable stream of income upon maturity.
CONS: The investment risk is relatively low and therefore may not yield high results. Early withdrawal results in penalties.
Individual Retirement Accounts (IRA)
There are several forms of IRAs but the two most popular include the Traditional IRA and the ROTH IRA, both of which are pre-tax saving vehicles. Traditional IRAs offer pre-tax savings, but the money is taxed when it is withdrawn. In contrast, the money invested in ROTH IRAs is taxable as regular earnings; however, the contribution and its gains are not subjected to tax upon withdrawal as long as the account has been open for at least five tax years.
Depending on your circumstances, retirement could be miles away or right around the corner. No matter who you are, retirement will come one day, and you best be prepared.
One of the best ways to invest for retirement is the IRA(Individual Retirement Account). The IRA is popular because of its ability to optimize the return on the money you invest for your retirement.
Here’s how it works.
With IRAs, you have access to different types of investments that can be tailored to your financial goals and risk appetite. Qualified financial advisors can provide expert advice and work together with you on determining the best investment solution for you.
For example, if you’re relatively young and are just starting your career, you have the financial leeway to be more aggressive, i.e., take on higher-risk investment plans because you still have a lot of time before retirement. If you’re already aged 50 and above, you may choose either a moderate-risk or low-risk retirement investment plan because you have less time before you need your retirement money. If you take on riskier plans that late in the game, you may not have enough time to recover any potentially significant investment losses.
PROS: Can be withdrawn at age 59 ½ or later without penalties or under certain circumstance which include college tuition expenses, exorbitant medical bills or the cost of sudden disabilities.
CONS: Contribution amounts are limited. Most people under the age of 50 cannot contribute more than $5,000 per year. No matching contributions from employers.
The 401(k) investment plan is one of the most popular investment products. These employer-sponsored investment plans are pre-tax savings channels which allow employees to contribute to their retirement plans. Many companies offer some sort of incentive for contributions such as matching contribution. In addition, many individuals prefer the 401(k) because of the sense of control over investment strategies, with most plans offering around 16 choices. For example, a younger professional may choose more risky investments opportunities than those who are closer to retirement age.
An advantage to investing in a 401(k) for your retirement is matching. In most 401(k)s, employers offer to match your contribution to the 401(k), the degree of which varies. Some firms contribute up to 50% of your personal contributions while some give the same amount as you do in the 401(k). Simply put, you end up investing more into a 401(k) than what you actually put in because your employer matches your contributions on your behalf. Your invested retirement money automatically increases the moment you contribute because of matching.
A disadvantage of investing in 401(k)s is their relatively long time horizon. It goes without saying that for you to really reap significant investment returns from your 401(k), including your employers’ contributions, you have to grow old and retire with your employer. Of course no one can stop you from resigning and jumping ship but keep in mind that depending on how long you’ve worked for your company, it’s possible that you get taxed higher and you don’t get to claim your employer’s contributions. So if you’re the type to jump ship often and you plan to rely on your 401(k) to fund your retirement, you might want to think twice.
PROS: The 401(k) vendor does most of the administrative paperwork, from accounting to tax filing, making this an easy plan for the investor. Most companies offer some sort of incentive for investing in company plans.
CONS: Contributions are limited to $17,000 per year, and are subject to a 10% penalty if withdrawn prior to retirement at the age of 55 or the age of 59 ½. Eligibility to enroll is at the discretion of the employer.
For many younger professionals, retirement seems a world away, but it’s never too early to beginning investing. And for those who haven’t yet begun, it’s not too late. By not taking advantage of the portfolio of investment opportunities you are limiting your retirement resources to social security and will truly be living on a fixed income.
See also Do I Need a Financial Advisor