Finance Globe

U.S. financial and economic topics from several finance writers.
7 minutes reading time (1366 words)

Plan for Your Retirement ASAP

If you've thought about opening an Individual Retirement Account (IRA), good for you. The hardest thing about saving for your future is making the decision to do it and following through. Your retirement may be many years away, but it's never too early to start preparing for it. As a matter of fact, the sooner you start, the less you have to work at it; you will have the magic of compounding working for you. If you are planning to retire soon, it's never too late to take steps to make your retirement more comfortable.

You may be presented with a challenge that many consumers face.
Would you rather keep up with your current lifestyle or invest for your future? Those on limited income may have a hard time making a sacrifice today, for something they won't see for years to come. It's relatively painless to give up a small habit that can easily amount to a hundred dollars a month, which is a good initial starting point for young investors who have many years to retirement age. Cut back a few nights outs every month, give up a several-dollar-a-day habit, or cut out an unnecessary club membership. What if I put it to you another way? If it's not easy to provide funding for all your needs now, how do you think you will be able to afford your lifestyle once you stop working and no longer receive income? It's okay to start small in building your retirement nest egg, as long as you start as soon as you can.

Before you start socking away retirement money, get a firm grip on your present-day expenses.
Pay your credit cards, auto loans, and other loans off, first. There's little benefit in tying up money for your future when you have to pay interest on your debts every month. This is extremely important, especially if you've only been paying the minimum payments. It can take thirty years to pay off a high interest credit card if you only pay the minimum, which means you could be looking at retirement long before your credit cards are paid off! Start with your highest interest accounts, and work your way through them until they are all paid off. Even if it takes months or years, it will pave the way for your future security.

Should you pay off your mortgage before you open your IRA?
That depends on your situation. Younger people who have at least 10-15 years before retirement are normally advised to invest in stock-heavy mutual funds through their IRA. The stock market has historically gained 10-12% over the long term, far exceeding the typical 6% mortgage interest rate. Take into consideration the mortgage interest tax-deduction, and the same mortgage rate becomes equivalent to about 4%, depending on your income tax bracket and how much interest you're still paying on your mortgage. You'll probably get more for your money by investing, rather than by paying off a low-interest debt.

If you're closer to retirement you're in a different situation. If your home is nearly paid off, you may not have much of a mortgage interest deduction to benefit you. Those with less than ten years to retirement are often advised to invest in safer bond funds, and cash instruments like CDs and the money market, since you have less time to recover from the ups and downs of the stock market. Gains on those safer investments will be much lower than stock market gains, and may even be lower than your mortgage interest rate. Paying off your mortgage may be the smartest choice before you invest in an IRA. In addition, paying off your mortgage before your retirement will eliminate your largest monthly expenditure, and will allow you to live on much less income. Consult a financial planner to help determine the best choice for your situation.

Once your debts are paid off, save for an emergency fund.
You want to be sure to have a cushion to fall back on, before you tie your money up in an IRA. Emergency money should be kept where it will be safe from market fluctuations and you can get to it easily, like an FDIC-insured money market account. While many financial experts recommend 3-6 months living expenses, some say that is too much to keep in a low-interest earning account. Only you can decide how much you need to feel secure. One factor to consider is whether you pay all your own bills on only your income, or if you have a spouse or someone else who contributes to your living expenses. If a single person lost their job, got hurt, or became very ill, losing income could easily spell financial disaster if they didn't have enough saved. On the other hand, if one person lost income in a two-income family, they may be alright with less of an emergency savings; it's much easier to stay afloat if your income is cut by half versus being cut by 100%.

As you pay off your debts and build up some savings, begin to research investment options for your IRA. Mutual funds are a great option for long-range goals, and normally the best choice for beginning investors. Fidelity, Vanguard, and T. Rowe Price are three large mutual fund families that offer a wide variety of low-cost, no-load mutual funds for any investment objective, and also have funds specifically for retirement accounts. The retirement-oriented funds offer automatic asset allocation according to your target retirement date. Retirement funds start off investing aggressively in stocks in your early years, and gradually shift to more conservative investments, such as bonds and cash instruments as you near your target retirement date. These types of funds take all the guesswork out of investing for your future; you can ensure a balanced portfolio by investing in just the one fund. Simplify your retirement strategy even more by enrolling in an automatic investment plan. Automatic investments will ensure that you never forget to send a check. Budgeting for it will become easy, since you'll learn to treat it like any other repeat expense.

The stock market offers the best returns if you are investing for the long-term, but it does come with the risk of loss, and may not be the right choice for some. You may wish to invest fairly conservatively if you plan on retiring in less than ten years, or you are simply not willing to risk your money in the stock market in hopes of higher returns. In this case, the preservation of capital takes precedence over possible gains. A very conservative investor can put retirement money into FDIC-insured savings vehicles such as a money market account, or CDs. Federal bonds, such as Series E savings bonds and T-bills, are not FDIC-insured, but they are backed by "the full faith and credit of the U.S. government", which means they are as safe as it gets. You'll pay a price for the safety of these types of investments, in the form of lower returns.

Smart decisions now can give you freedom in your retirement years.
Freedom to travel the world, freedom to immerse yourself in your favorite hobbies, or the freedom to play, day in and day out, with your future grand kids. Retirement does not mean confining yourself to a rocking chair with a newspaper and a cup of tea, though you may occasionally choose to do so. Having the choice is what will make your retirement rewarding and enjoyable. Think about all the extra time you'll have when you no longer have to go to work everyday. What will you want to do with all that time? You have a much better chance of realizing your lifelong dreams if you have the money to fulfill those dreams. Take your retirement planning seriously; you don't want to be forced to go back to punching a clock in your later years just to make ends meet. Many people will live to a ripe old age, spending 20 to 30 years in retirement before it's all over. Do what you can now, so that those last years of your life are as rewarding as the rest of it.
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Friday, 18 October 2019

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