Retirement funds are the backbone of your long-term financial plan and can involve any number of investments, from a regular 401k account to a diversified mutual fund. Your mix of retirement funds can depend on many factors, including your age, your current income, when you plan to retire and the kind of lifestyle you hope to have while retired. Finding a certified financial advisor who understands your long-term goals can help you determine the best places to invest your money at different times of your life to maximize your returns without taking too much risk.
The best place to start for most people is with a simple 401k plan. Many companies allow employees to contribute to this plan through automatic withdrawals, making 401k an easy and painless way to get a head start on saving for the future. In some cases your employer will even match your contributions up to 100 percent, although this is not always the case. You can contribute up to $16,500 annually toward your 401k plan. These funds can be contributed on either a pre-tax or post-tax basis.
An alternative to 401k if your company does not offer this plan is an individual retirement account, or an IRA. A Traditional IRA allows you to legally contribute $5,000 a year to this tax-deferred account. That is, you do not need to pay taxes on your contributions until you start to withdraw funds during retirement. Not only will your money grow at pre-tax rate, but you'll also likely have a lower income during retirement so you'll be taxed at a lower percentage. Some people prefer a Roth IRA. With this account, you pay as you put money in and can withdraw with a tax break. A Roth IRA can encompass a number of investments, including securities, and even derivatives or certificates of deposit. A personal finance councilor can explain other differences between Traditional and Roth IRAs for you.
Beyond 401k and IRA plans, there are several retirement funds to choose from. You will probably want to include many of them to maintain a diversified portfolio, and should utilize a retirement planning calculator. Even riskier investments like common stocks have some role in your retirement mix if you start planning while you are young. For example, if you are a forward-thinking college student, some financial companies recommend putting nearly 90 percent of your retirement funds in stocks, with a little more than 9 percent in bonds and less than 1 percent in short-term reserves. This composition isn't recommended to shift until you reach your 50s, when stocks and bonds are recommended to become more balanced. A personal financial advisor can help you determine the best mix for your own funds based on your unique long-term goals and other factors, such as your age and income.
If you plan to retire within the next decade, your options will be somewhat different than when you were younger. One advantage is the ability to legally contribute more money toward your 401k and IRA accounts. When you turn 50 years old, you can start to contribute $6,000 to your IRA and up to $22,000 to your 401k. This will help you "catch up" before you retire. At this point in your life, your retirement funds should start to carry less risk. You portfolio will probably have more bonds than stocks, and your advisor will probably advise you to remain diversified. For this reason, financial experts often recommend keeping your money in mutual funds. While you are in your 50s, having a small portion of your retirement funds in stocks or foreign investments is still OK, but you will probably want to convert most your retirement funds into bonds, an IRA or even cash, depending on your age and how liquid you need your money to be.
Knowing which retirement funds to invest in can mean the difference between a comfortable retirement and one full of uncertainty. If you start planning for retirement while you're young, however, you have a much better chance of recovering from mistakes. If you wait until you start thinking of retiring, your options are far more limited. By speaking with a personal finance expert and determining the right mix of investments to start with in your 20s, you will be in a much better position in your 30s and 40s to choose more diversified funds and perhaps get a little more aggressive with the investments you choose. When you have money to work with because of smart decisions in your younger years, retirement funds can even become fun. Just be sure to act in conjunction with a professional financial advisor who has a good understanding of markets, tools and investments that will help you reach your long-term goals.
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