How to Build a Retirement Plan?
Brian Carrozzi - November 1, 2013
In our recent article Retirement Planning 101: The Basics, we explored how to figure out your retirement needs by first looking at your expenses then your life expectancy and finally figuring out what your goal will need to be to achieve a successful retirement. In this blog post we’re going to talk more about some of the investment choices you have once you figure out what your income needs are in retirement or as you’re building your retirement plan during your working years. With that, let’s get down to the common investment choices you have along with the benefits.
- Stocks – this is a common and very well known area for people to invest in for retirement. The choices here are endless from mutual funds and ETF’s, to single stocks. The challenge with stocks is that they carry a lot of risk and because of this are a good tool to use if you have some time until you retire. For retires, stocks can really take a bite out of your retirement funds. Many people close to retirement near 2008 lost up to 50% of their account value if they were heavily invested in stocks. That can be crippling and hard to recover from when you’re older so manage this allocation wisely.
- Bonds – Although bonds are considered to be “safe” investments, they do carry risk. Many countries, companies and municipalities will start to default as the global financial pressures continue. When this happens, your bonds are typically a total loss. Yes, you can get ten or twenty cents on the dollar but it can still leave you with huge losses including the loss of income you were getting from the interest payments. When investing in bonds be sure to invest in financially strong companies, municipalities or countries so you can have a better chance of getting the returns you expect.
- CD’s – CD’s can be an effective way of receiving guaranteed annual income. In the US, the FDIC guarantees up to $250,000 if the bank fails. Right now, banks are not paying attractive rates for CD’s but that can change over time making this an attractive area to keep an eye on in the future.
- Annuities – Annuities are powerful retirement income generators and new classes of fixed index annuities are hybrid vehicles that can really help you guarantee income when you retire so that you don’t run out of money. Many life insurance companies offer these and it’s important to select a financially strong and highly rated insurer to make sure your funds are there when you need them.
When analyzing your investment mix, you need to understand how much you have to invest per year and then understand what your rate of return must be to achieve your end goal. With some more safe investments like CD’s, bonds or annuities, you can almost guarantee your returns and/or income in retirement, which can make structuring a successful retirement plan easier. Consult with a qualified financial professional to help you with this. Understanding what your investment options are and your retirement needs will put you ahead of many other people who will be surprised to find that they don’t have enough money saved once they’re in retirement or that they invested in the wrong things.
Disclaimer: Please seek professional advice regarding tax liability and investing options based on your personal situation.