Long Term money. This is a difficult concept. This is your contingency plan. This is the money you have left after paying for school loans, cutting up your mortgage, taking care of your car, and other day to day, week to week, month to month obligations. The problem we have is we are attempting to plan for a future based on what we know in the present and past. What will the stock market do? What will Real Estate do? Will the supply lines to the Middle East and Asia still be viable? What will the political climate look like? My usual trite answer is, “I left my crystal ball in my other pants.” If you are middle age or older, your best guess may be pretty close to the mark. You may be looking only 15-20 years into the future, but (and this is a big one) look back 20 years. Could you have foreseen your present circumstances? Many people look upon their current circumstances and think to themselves, “if only I knew then what I know now…” You can get an inkling by reading history, talking to older people, doing your research on line. However, you will NEVER know what the future will bring.
The other problem is as previously mentioned: if you worry about guarantees and safety, you restrain yourself from making any money. This is your future though. It’s not a game. If you mess up, you may not have time enough to recover. Soooo….what’s out there?
Traditional IRA’s allow you to save money for your retirement with favorable tax treatment. You can invest $5000/year and you get a tax deduction for your investment. You can put nearly any type of investment into an IRA–stocks, bonds, mutual funds, bank accounts, certificates of deposit. It is NOT insured by FDIC, so it might lose value.
Roth IRA’s allow you to save money for your retirement with favorable tax treatment. You can invest $5000/year and you pay NO taxes when you withdraw at retirement. But you do not get a deduction on your taxes for contributing. Both these Accounts, traditional and Roth IRA’s, have a catch-up provision that allows you more contributions per year if you are over 55.
If, however, you withdraw your money before age 59 1/2 without regard to the IRS’s exceptions, you pay a 10% penalty and taxes.
These are rather complex strategies. YOU HAVE TO READ THE CONTRACT! They come in several different types. You have your fixed annuities which means you put your money in and you get a percentage guarantee. Then you have fixed Indexed securities that are tied to a specific index–S & P 500 for instance. Then there are variable annuities that follow the stock market. Depending on the investments, they can be more or less volatile than the market. There are some annuities that do not annuitize or pay you a specific sum for the rest of your life. You can make withdrawals for the rest of your life, but at no time does the company take over the annuity and pay you. There are some annuities that require you to annuitize at a certain age or at a specific contract year. They take the amount you have invested, add the interest and capital gains, do some calculations and come up with an amount they will pay you as long as you live. There are also some annuities that allow you to choose whether or not to annuitize.
The “fun” comes in the pay out. There’s a single life annuity, joint with rights of survivorship, joint, period certain, amount certain… The easiest thing to remember is that the more people on the contract, the more guarantees, the less the pay out.
COMPANY PENSIONS AND 401K, 403b, KEOGH, etc.
Company plans vary as much as the companies that use them. Some match your donations dollar for dollar, some match up to a percentage of your pay, some contribute a straight percentage. Unless they have a professional investment advisor on staff, there won’t be the comprehensive information you need to choose your investments. Many times, they have very few investments to choose from. The general rule is contribute only up to the match, then invest the rest elsewhere.
There are a myriad of investment books you can study, but I would recommend you find a reliable Investment professional to work with you one on one. Your investment person should probably be one that doesn’t only make a commission when he does a trade, but more someone whose fees are based on the performance of your investment.