Are you looking forward to retirement? Even if you’re still a few years away from retirement you should already be contemplating the best financial retirement investment options. By doing so, you will be able to enjoy your retirement years and the fruits of your labor. It also ensures that you don’t have to rely on your kin, the welfare system or anyone else financially.
There are many types of financial retirement investments available but here are the most common:
Individual Retirement Account (IRA)
It is a type of savings account that is meant to help one save up for retirement and provides tax advantages. The types of IRA’s are the following:
- Traditional IRA – it may be deductible or non-deductible depending on the nature of contribution and withdrawals at retirement are taxed as income while all transactions and earnings have no tax impact.
- Roth IRA – withdrawals are usually tax-free, all transactions have no tax impact and contributions are done with after-tax assets.
- SEP (Simplified Employee Pension) IRA – it may be set up by self-employed persons like freelancers, small business operators and independent contractors and follows the same withdrawal taxation rules as a traditional IRA.
- SIMPLE (Savings Inventive Match Plan for Employees) – it is tailored for small business and self-employed persons, has the same taxation rules like a traditional IRA and all contributions are tax-deductible.
Advantages:
- You can transfer your IRA funds.
- It is easy to maintain and you don’t need approval to use your money.
- You have control on how you invest your savings.
Disadvantages:
- Your IRA funds are subject to income taxes and a tax penalty of 10% if you withdraw before reaching the age of 59.
- You cannot use your IRA funds if you’re planning to secure a loan.
- Your IRA funds may not be protected from creditors but this depends on a state’s law.
401(K) Plan
It is an employer-sponsored retirement plan for eligible employees and may also include a profit sharing feature. Investments are usually automatically deducted from an employee’s pay check and employers often match the contributions of employees (although this is optional and determined by the employer).
Advantages:
- With a 401K plan your money grows and is initially tax deductible
- You only pay taxes once you withdraw it upon your retirement.
- You will get a significant return of investment if you invest it wisely.
Disadvantages:
- You can only withdraw your 401K plan once you reach the standard retirement age of 59.5.
- It is not FDIC (Federal Deposit Insurance Corporation) insured therefore it is subject to losses if not invested wisely or in the case of a down market.
- If you withdrawyour 401K plan before retirement age you are subject to a 10% penalty and pay the taxes of the amount you withdraw
Stocks and Shares
It is a share in a company’s ownership and represents a claim in a company’s earnings. The more stocks you acquire, the greater your ownership stake in a company. Your money can grow quickly if you invest it in stocks and shares but with much higher risk.
Advantages:
- Stocks are liquid which means that they can be bought and sold allowing you immediate access to cash.
- It has potential for significant gains as compared to bonds and other investment options.
- You have the freedom to participate in a company’s growth and entitled to its profits and benefits via dividends and capital gains as a stockholder.
Disadvantages:
- Stock price can be very volatile and prices can become erratic.
- Stock values can drop significantly putting your investments at high risk.
- There are acquisition and sales costs associated with buying and selling.
Bonds
It is a fixed income investment wherein a corporate or government entity borrows funds from an investor for a certain time at a fixed interest rate. It is used by states, corporations and governments to finance specific projects and is usually publicly traded on exchanges. The 3 main categories of bonds are:
- Municipal bonds – issued by states and municipalities
- Corporate bonds – issued by companies
- S. Treasury bonds – referred to as a government treasury along with notes and bills
Advantages of Bonds:
- It is often liquid and can be sold in large quantities without any effect on price.
- There is a bi-annual fixed interest payment and fixed maturity lump sum.
- There is legal protection and bondholders can still retain the recovery amount should a company go bankrupt.
Disadvantages of Bonds:
- Price changes instantly affect mutual funds that hold the bonds.
- Bond prices become volatile based on the issuer’s credit rating.
- It is subject to various risks like credit risk, exchange rate risk, inflation risk and reinvestment risk, among others.
Having a clear understanding of popular financial investment options allows you to decide more clearly on the right investment option that works best for you. Whether you plan on investing in stocks, bonds, IRA or 401K, what is essential is to invest your hard-earned money wisely so you will be financially independent and be able to enjoy your retirement for years to come.