Retirement

"If you aim at nothing, you will hit it every time." - Zig Ziglar

The Road to Retirement

The first step in working towards retirement is to dream. This is the fun part of personal finance. Spend time figuring out what you want in retirement.

So what are you aiming for in retirement? Do you want to travel frequently, volunteer, or spend time with family on a lake?

The earlier you being dreaming and working towards retirement the sooner you will achieve it.  Compound interest is retirement's ally.

So where should you start?

1. Understand your workplace retirement benefits.

Many careers have retirement benefits. While onboarding at a new job, you may be confronted with several choices, such as enrolling in a pension plan, 401k, Roth 401k, and more.  Pay attention and ask questions.

2. Find a fiduciary financial planner.

A fiduciary is required by law to work in your best interest. This means that your needs must be placed above their needs and desires. When seeking professional advice from a financial advisor, interview them and be sure to ask if he or she is a fiduciary. You should feel comfortable asking questions about investments to this person.

3. Follow up and monitor your investments.

It is important to understand your investments and keep up with what you have your money invested in. You can make changes to the retirement vehicle (option) you have placed your money. Remember that retirement is a long-term goal and so you can expect dips in the market.

 

Which investment vehicle is best?

There are many options to saving for retirement. The stock market is often utilized in workplace retirement benefits.

Stocks versus Mutual Funds

Individual stocks can be purchased. Each share purchased gives ownership in an individual company, such as Apple or Zoom.

Mutual funds are several individual stocks held together under one umbrella.  When a person purchases a share of a mutual fund, a portion of ownership is given in each company held within the mutual fund. Mutual funds are managed by professional investors.

Pension versus 401k

Both plans are considered defined plans. There are defined-benefit and defined-contribution plans. 

A pension plan is a defined-benefit plan. The employee works a designated amount of time in exchange for a guaranteed paycheck upon retirement. The defined benefit is the amount the employee would be paid in retirement. This plan is not seen frequently any more as it is more costly for the employer.  

A 401k plan, named after the law that creates these accounts, is a defined-contribution plan. If offered, both the employer and employee can contribute to the account. Many times employers will match the employee's contributions up to a certain percent.  

Dive deeper into pension and 401k plans.

Tax-Deferred versus Roth

A tax-deferred account, such as a 401k, reduces this year's taxable income by contributing to the retirement account prior to taxes being taken out. This reduces a person's taxable income in the current fiscal year.  When funds are distributed during retirement, taxes are due on the growth. 

A Roth IRA account receives contributions after taxes are paid.  When it is time to withdraw funds from the account in retirement, the growth is tax-free. There are income limits to ROTH accounts.

What is diversification? 

It is important to spread your investments out into a variety of investment options.  If you have all of your money invested in a single stock company and the company goes out of business, you will lose all of your money. You can diversify by purchasing mutual funds or several different stocks.

Remember that saving for retirement is a marathon and not a sprint. There will be ups and downs in the stock market. You may alter your plan to be more aggressive or conservative based on your risk tolerance.  A financial planner can help you better understand your risk tolerance. Your dreams will guide you on how much and where you should place your investments.