As social security concerns grow and pension plans get phased out, the need for individuals to invest for their own retirement has become essential. The basic rules for investing are simple but effective. Whether you're 20 years away from retiring or already retired, there are several things you need to know to be successful: commit to saving, choose the right type of account and diversify your investments.
Commitment to Saving
Arguably the most important rule of retirement planning is to contribute funds on a consistent basis. Treat investing like a bill. Allocate a specific amount of your paycheck to go toward retirement and set it up to automatically draft. It's like the old adage: “out of sight, out of mind.” The result of just putting $100 a month away can be dramatic. Even with a conservative 5 percent return, an investor who puts away $100 per month for 30 years will end up with almost $80,000.
Choosing the Right Vehicle
If your employer offers a matching 401(k) plan, the most efficient use of money would be to contribute up to the maximum match available. The reason behind this is simple. If your employer matches dollar for dollar, then even when your investments stagnate and earn no return, you still double your money. For individuals, the Roth IRA in most cases is a better choice than the standard IRA, especially if you have a 401(k) on top of it. Because money is taxed up front in a Roth IRA, all gains are treated as a nontaxable event when you withdraw after the age of 59½. For the standard IRA, the IRS states that the tax-deferred contributions normally associated with such an account will be phased out if that person also has a 401(k) retirement plan.
As with all investing, diversification is fundamental. Make sure your money is spread out among various investments in bonds, stocks and mutual funds. The last thing you want to have happen is a market crash the year you retire with all of your money invested in stocks. Mutual funds are a great way to diversify your holdings, but don't assume that it means everything is properly allocated. Do your homework and make sure you have a mixture of fund types that don't overlap.
Maintain Your Investment
Investing for retirement can quickly be derailed by a sudden unforeseen event. It is important to have an adequate emergency savings account stashed away and proper insurance in place for protection. All your hard work in making retirement contributions will be hurt exponentially by having to withdraw funds early from a retirement account. Not only are you shortchanging yourself by taking out money that's earning interest, but you'll face stiff tax consequences as well. The IRS imposes a 10 percent tax penalty for withdrawals in a retirement account before turning 59½, with a few defined exceptions.
- "Planning for Retirement Needs," David A. Littell, et al.
- "20 Retirement Decisions You Need To Make Right Now," Ray LeVitre
Daniel Cross resides in Florida and has been writing investment and financial articles since 2005. He holds the Chartered Financial Consultant designation from the American College in Bryn Mawr, Pennsylvania.