In your early years, 20’s and 30’s, investment for retirement should consist of either a 401K with a contribution up to the limit to get the full match, or higher if possible. If you are offered a match for contributions up to 3 or 6 % of your income and you don’t contribute that amount, you are giving away free money!
If a 401k is not offered by your employer, you should at least contribute to an IRA every year. If possible make this an automatic occurrence by having it drafted from your checking account or paycheck. This is the best way to pay yourself first.
If you can’t set up monthly contributions to your IRA, then setup a savings account that you will deposit into the IRA either quarterly or annually.
After you fund a 401k or an IRA, you can branch out to other types of investment for retirement or otherwise, such as mutual funds, individual stocks, or real estate, for example.
But the reason you start with 401k and/or IRA accounts is because they provide tax benefits. That translates to paying less taxes on your total income. (This can change at any time if the government changes the tax law, for better or for worse.)
Once you are in the habit of investing part of your income for your future retirement, the next step is to make up your mind to increase your contribution each time you get a raise or eliminate another expense. For example, when the baby doesn’t need diapers anymore or when the kids “graduate” from daycare. These are “raises” in your disposable income that would make an increased contribution relatively pain free for your budget.
Another thing to consider is the choices of investments within your 401k or IRA accounts, and investment risk. In recent years there are age-based funds, or target retirement funds that are meant to correspond to your stage in life. They are setup to distribute your contribution according to the risk appropriate for your age, becoming more conservative as you get older.
By the age of 40, it is a good idea to consult a fee-based financial advisor who can evaluate the investment options available to you and make recommendations on how to direct your contributions. During this consultation, the advisor can also recommend how to rebalance your portfolio.
Let’s take a moment and talk about what “rebalance your portfolio” actually means. Conventional wisdom says that in your early years of saving for retirement you can tolerate more risk, so it is appropriate to invest more in stocks or stock funds that have a higher potential for gains.
The more risk, the more potential for gains and the more potential for gains, the more risk there is. But after 10 or 20 years, you may not be as comfortable with the same degree of risk. You may decide, based on good advice or your own increased knowledge, that you want to reduce your exposure to risk and have some of your portfolio in more conservative investment for retirement. When you do this, you are in effect rebalancing your portfolio according to your goals. Similarly, after a few years your riskier investments that have done well will have a higher percentage of your total portfolio.
To rebalance and get back to your preferred distribution of risk, you move some of your gains from the higher risk investments to the more conservative and safer investment for retirement to safeguard that portion your savings.
Regarding your advisor session, in addition to helping you rebalance to the appropriate mix of risk, the advisor can give you an analysis of your retirement plan to tell you if you are on track or whether you need to increase your retirement savings to meet your retirement goals.
Before this advisor meeting, you should think about what those goals are.
At what age do you want to retire?
What do you plan to do when you retire? Will you start your own business, travel extensively, buy a horse farm?
Whatever your idea of retirement is, you need to be able to describe how much money it will take to support it.
In addition, you should be prepared for the meeting with statements from your investment accounts and your current budget and income information.
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