Investing for Retirement

There is abundant advice floating in the popular consciousness for young investors looking for the best way to invest for long-term goals, such as buying a house or planning for retirement. There is the popular rule that allocates an investment portfolio based on age. For instance, if an investor is in their early twenties, their portfolio should be invested ninety percent in stocks and ten percent in bonds, with the bond to stock ratio growing as they age.

Since the time horizon, the number of years that an investor has to wait before their investment matures, is very long-term for young investors, they can afford to take a lot of risks. The key thing to remember is that the stock market, while notoriously volatile in the short term, can in fact be very consistent long-term. The trick is to focus on allocating the investments in one's portfolio in such a way to reflect the investor's current short-term and long-term goals, which vary with age and their particular stage of life.

There are several mistakes that investors make as they travel along the road to retirement, and several ways that they can profit, as well. When thinking about retirement, there are multiple investment vehicles that come to mind, such as Individual Retirement Accounts, or IRAs, 401(k)s, etc. Investors need to be aware of their options when it comes to investing their retirement money.

IRAs come in two main flavors, traditional and Roth. IRAs are incredible investment vehicles because they are tax-deferred, which means that when investors make a contribution to their account, they can make it out of their gross income. This means that making contributions to a retirement account lowers the investor's tax bill. For example, an investor who makes $70,000 per year and makes a contribution of $5,000 figures taxes on only $65,000.

For a traditional IRA, all growth and gains are tax-deferred until the investor begins making withdrawals. This means that the money in the IRA is not taxed until the investor starts to withdraw it. Except in special circumstances, such as using the IRA to pay for a child's educational expenses, the investor cannot withdraw the IRA until they reach the age of fifty-nine and one-half.

A Roth IRA is different from a traditional IRA in that the investor cannot take contributions to a Roth IRA as deductions. However, the proceeds and withdrawals from a Roth IRA are completely tax-free. The investor can enjoy the gains without paying any taxes on them.

A 401(k) is an employer-sponsored employee savings plan that functions similarly to an IRA. The employee elects to have a portion of their total wages deposited in their 401(k) account. The employee can deduct their contribution from their tax liability like a traditional IRA. A big difference is that the employer can match their contributions by depositing an amount equal to half or all of the employee's contributions as the employee makes them. This effectively doubles the amount that the employee can contribute.

IRAs and 401(k)s are not the only retirement investing options, however. Many employers offer pension plans in addition to their 401(k)s. Pension plans are not set up by the employee, they are government-mandated savings accounts that employers make contributions to.

Another popular retirement option is to purchase fixed or variable annuities. An annuity is an insurance product that pays a predetermined annual sum, usually on a monthly basis. These are complex life insurance products that are hard to understand without professional help. High net worth individuals and above-average income earners use annuities to transfer large sums of money while saving tax dollars.

Retirement investing involves knowing what options are available, and which ones are appropriate for the investor given their financial and personal profile. In an ideal world, retirement is a time of gentle joys as the investor prepares to leave this world. Knowing how to invest their savings, and starting to save and invest young, will help them achieve the growth they want and the stability they need.