Planning and saving for retirement is not always as straight of a path as the experts make it out to be. There can be a lot of complex decisions regarding which ones will grow more, which plan has the better tax advantages, and when you’ll actually be able to access your money without penalty. For someone just starting out can make picking from the right retirement investment options a pretty difficult task.
Fortunately you don’t have to be exotic with your investment style in order to build up a sizeable retirement nest egg. To be effective you really only need to stick to a few basic, core investment strategies to guarantee your chances of success.
Here are a few of the best retirement savings options to start with.
Employer Sponsored Retirement Plans:
Depending on what kind of job you have, you more than likely have the option to save money for retirement in either a 401k or 403b.
401k’s have become the most popular and common type of employer sponsored retirements savings plan. The way it works is that you contribute a portion of every paycheck every two weeks into an investment account before the taxes are taken out. The money then grows tax-free until you need it when you actually retire.
The great thing 401k plans is that your employer often makes contributions to it on your behalf – essentially giving you free money! 403(b)’s work in pretty much the same fashion as a 401k but are generally reserved for government employees and don’t usually receive employer contributions.
Most employer sponsored retirement plans allow you to invest your money in lots of different options such as mutual funds composed of stocks, bonds, and cash investments. Sometimes the plans can also consist of individual stocks or mutual funds composed of alternative investments like precious metals or real estate.
If you’ve got this option, you’re going to want to max it out! As of 2014 you get to save a maximum of $17,500 every year. That’s like saving $4,375 in taxes every year! If you’re 50 or older, your contribution limits jump up to $22,000 per year which is like saving $5,500 in taxes.
IRA’s are another one of your best retirement investment options in terms of avoiding taxes. Keeping your money in an IRA allows you to save even more beyond what you’re allowed to contribute to your 401k plan.
Generally IRA’s are available as either a Traditional or a Roth-style plan. The traditional plan works very similar to the 401k where you avoid paying taxes now and wait until you use the money at retirement. A Roth plan works the opposite where you DO pay taxes now and then don’t pay any taxes on the money you withdraw for retirement.
IRA’s generally have a lot more investment options than 401k plans do. You can invest in traditional assets like mutual funds, stocks, and bonds. Or you can invest in more exotic assets like real estate, gold and other precious metals.
Similar to the tax advantages of your 401k, you’re going to want to contribute as much to your IRA as possible to save the most money.
Capital Gains and Dividends:
The capital gains and dividends you receive from stocks or mutual funds are an often over-looked but very effective investment option for your retirement savings.
Capital gains are the money that grows on top of what you originally invested when you bought the asset. So for example, if you paid $1,000 for some stocks and sold them at $1,100, then you’d have $100 in capital gains.
Dividends are the payments that companies pay to their shareholders simply for being an owner of the stock. There are many savvy investors out there who recognize that if you have enough dividend paying stocks, you could earn thousands of dollars each month from them by doing absolutely nothing at all but holding them.
As of 2014 the money you receive from these capital gains and dividends gets taxed at a lower rate than the ordinary income you earn from your paycheck. Though that may not sound like too big a deal, it can be really helpful in keeping your taxes low so you get to keep more your money.
Retirement Investment Options You Should Use with Caution:
While the following retirement investments have worked for many people, they can be tricky or down-right dangerous for others. Here are the ones to watch out for.
- Annuities: If it’s guaranteed income you want for retirement, annuities can be a great investment option to make sure that you do just that. However they should only be purchased from a trusted broker. Although the prospect of receiving monthly income until the day you die may sound like a good idea, you have to be careful with the fees and contract rules that accompany them because sometimes they can be manipulated against you.
- Rental properties: Lots of people have had success with owning and renting properties as a means of making retirement income. However just about the same proportion of people have also had negative experiences with it as well. It takes a special kind of person to be a landlord. So before you become one, make sure you understand all the responsibilities and legal obligations you’d have to oblige before you do.
- High-return stocks: Unfortunately greed sometimes gets the best of us when we’re looking for lucrative retirement investment options, and scammers love to prey on us for this. One of the ways they do this is with the promise of high-return penny stocks or options. If anyone ever promises this to you, just forget about it! Lots of research proves that over the long haul you’re simply better off investing in a stock market index fund rather than trying to beat the system. If you want to keep more of your money, keep your investments simple.
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