Years ago, workers did not have to be overly concern about saving for their retirement or needing to invest. Those who worked a steady job throughout their career could expect their employer to provide them with a pension check after retirement. In addition, social security federal benefits and personal savings and investments provided additional income for their golden years.
As many employers continue to eliminate pension plans, employees are increasingly taking on the responsibility of funding their retirement by with contributions from their own earnings. There are also serious concerns whether the social security retirement system as we know it will be around in the future.
Consequently, individuals must take on primary responsibility for ensuring that they the necessary income to live their desired lifestyle when they retire.
Start with tax-deferred retirement accounts
To save money for your retirement you should start with 401(k)s and individual retirement accounts (IRAs). Although there are some differences, most of these programs allows you to put away money from your paycheck, defer the taxes on the money and any income earned within the account.
Tax deferred means any amounts you contribute are not subjected to income tax. When you start withdrawing the money, years later, you will pay income taxes and probably at a lower tax rate. You should first maximize your contributions to these accounts because of the significant advantage they offer over taxable accounts.
In addition, many employers match employee’s contributions to employer-sponsored retirement plans.
A report by the research firm Ibbotson Associates shows that the stock market returned an average of 9.8 percent a year between 1926 and 2009. The bond market showed gains of 5.4 percent. Many financial professionals recommend that you supplement your portfolio with stock if you want to build a nest egg for a retirement of 30 year or longer.
Some financial advisors recommends that you allocate 70 percent of your portfolio to stock and stock funds for a long-term growth strategy — if more than 20 years away from retiring. The remaining 30 percent should be invested in bonds. This allocation should also provide protection for downturns in the market.
Individuals approaching retirement should gradually move assets from stocks and mutual funds to bonds. Since retirement can last 20 years or more, most expert say you should keep a of stocks into the retirement years. They recommend 40 percent to 50 percent for 70 years and for those in their 80’s up to 30 percent.
Time guidelines for investing
The Motley Fools website recommend that people take control they provide four basic rules:
- Money you will need for the next years should be kept in the form of cash.
- Money needed for the next year, five or seven years should be tucked away in safe, income producing instruments. This category included U.S. Treasuries, Certificates of Deposit (CDs), or high-quality bonds.
- Money you won’t need for the next seven years should be considered for investment in the equity market.
The website also advises investors to always have a stake in the stock market.