Retirement Realities

If you have a retirement account, a 401k or IRA, you might be wondering what the best way to invest within its confines is for you. Afterall, how financially sound you are with the investment contained in your retirement account will mean the difference between a good retirement, a bad one or none at all.

Unfortunately there are many people who, as they approach retirement age, find they are unable to retire and do something wonderful with the rest of their lives because they weren’t prudent and didn’t pay attention to their retirement accounts when they were in their 30s, 40s, and 50s.

So if you’re reading this and concerned about the topic, you’re ahead of the game, because your interest means you want to do something about the money you are putting aside toward your retirement.

In general terms, there are several key retirement vehicles. Let’s look at the most common ones so you can get a general idea which one would be your preference, and then you can do more research or talk to some experts to get more information.

Individual IRAs (Individual Retirement Accounts): These are for individuals (hence the name) and can be opened at banks or brokerage firms. Federal laws regulate the amounts you can deposit each year into these accounts; as of this writing, the amount is $4,000 per year. This law seems to be firmly in place until 2010, but who knows? Make sure you check on the amount you can deposit, and then do your best to maximize the IRA by putting in as much as you can in any given year.

401ks, 403bs: These are retirement vehicles for employees at larger organizations. The benefit of these retirement accounts is that the employer usually makes matching deposits into the account. You administer it yourself if you want, you can have automatic deductions from your paycheck so you won’t even see the amount being taken out, and the retirement account grows and grows until you’re retirement age.

Keogh’s, SEP IRAs, and SIMPLEs: These are designed for the self-employed or small business owner, since the 401k’s and 403b’s of larger companies are too complicated (and costly) for you if you fit into the self-employed or small business owner category. The government created these vehicles for you to have the same retirement potential as your counterpart in big business. They are in essence personal pension plans you set up yourself with the proper organization: a bank, a brokerage firm.

What sets these retirement accounts apart from the IRAs and big business accounts is the fact you can put rather large amounts of money into them each year: between $6,000 and $30,000 a year. (I see a smile on your face, as you contemplate being able to put $30,000 into your retirement account in 2008: “Yeah, right,” you’re saying. But at least you CAN do it if you can. And that’s something!)

What are some of the benefits of opening up at least one of these retirement accounts as soon as possible?

First of all, your money grows tax-deferred, meaning no matter how good of a job you do of managing it and how much it grows, you will not have tax consequences until you’re retired, when those tax consequences should be much lower. This is in opposition to a regular brokerage account, where your tax consequences can be formidable for gains you make during any given year.

Secondly, a retirement account can be a forced savings plan, if you have automatic deductions go directly from your paycheck to your account. It’s money you never see, so hopefully you won’t miss it.

Thirdly, your taxable income is reduced by the amount you put into your retirement account, a factor that always helps when it comes to doing your yearly tax returns.

And lastly, your retirement account can experience tax-deferred growth, meaning a pure growth plan not hampered by taxable consequences.

Setting up the account; diversify

Now, I’m assuming you have set up a retirement account in the first place, either at a bank or at a brokerage firm (if not at your employer). It’s very easy to do if you need to take this first step: just go to the locale of your choice and talk to someone in new accounts or (if it’s going to be an online brokerage account), go to the brokerage firm’s Web site and follow instructions for opening up any kind of account, paying attention to the retirement information.

Once the account is set up, diversify your investments. One of the saddest things to have happened in recent years to people with retirement accounts is they have “put all their eggs in one basket,” meaning stuffing their retirement investments with shares of the company where they are employed. This is great if your company has tremendous growth and the stock goes higher and higher. In years’ past, for example, companies like Microsoft and Google have made millionaires of retirees who kept buying shares of those companies’ stocks to fund their retirement accounts.
However, on the opposite end of the spectrum, there’s the Enron debacle, where employees were wiped out completely and lost their entire retirement portfolio because they were so heavily invested in the company, which ultimately went belly up and sent the company officers to jail and early deaths. So make sure — even if you work for what you think is the best company in the world — that you diversify your retirement portfolio.

So, this is the time, by the way, to be a bit more aggressive in your investments within this account, since there are no tax consequences — in terms of capital gains taxes. Even if the investments in this account do fantastically well, you do not have to pay taxes on the profits until you start withdrawing money from the account, many years down the road, when your tax bracket will probably be lower than what it is now.

Of course, being more aggressive in a retirement account means you will have downturns in your portfolio. Relax! The ups and downs of the market should not impact you, because statistics are in your favor: over the years, even decades, the route of the U.S. stock market is decidedly northward and upward! Your philosophy concerning your retirement account must be this: I’m in it for the long haul; I’m picking equities and investment pieces that should, over the years, go upward rather than downward, I’ve done my homework, my research, so I’m going to sit back and let this money work for itself.

Can’t do it? It makes you too nervous, it deprives you of sleep at night? You keep seeing yourself as a bag lady on the street, you know, one of those women pushing shopping carts stacked with green trash bags filled with who knows what?

Then think about this instead: if you don’t do something about your retirement investment situation, you will be sorry. Don’t count on Social Security, don’t look to a man to rescue you from your future, or your parents, your company or your stockbroker. It’s up to you to monitor your retirement funding and where it’s working for you. Remember the mantra we have spoken over and over in this column: No one cares about your money like you do.

I have seen people – men and women alike – become paralyzed with their investments, particularly in their retirement accounts, and do nothing, to the detriment of their funding for their future. Like a deer caught in the headlights, they do nothing because they don’t know where to make the right moves, and by doing nothing, they watch as their plans to move to Florida go away with the downturns of the market.

You have to do some work on this to make it work for you in the future. All in all, a retirement is something you really should have. You owe it to yourself to give yourself the best possible retirement you can, and this will mean an amount of money saved during the years that you can live on until you die.

It’s not difficult to set up, so why not make the beginning of 2008 the time when you set your mind to this task and get it done? You will be the envy of your friends who have not taken on this job, with security written all over your mug. (And yes, a little gloating is allowed.)

After all, you’re a savvy gal who has assured herself of a future that is safe and secure.

So, until next time, happy and profitable investing.

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