Planning for retirement is never easy. It is a long-term process that requires a lot of effort and smart decision-making. Knowledge about the essentials of retirement and investment is a fundamental step to determining which processes and growth opportunities to pursue. While hiring a financial consultant introduces a system in the planning process, the investor should still be apprised of crucial points like finding a passive income, avoiding fad investing, being tax efficient, and thinking about long-term benefits.
Retirement planning is done best during youth and gainful employment. For instance, putting money early on Individual Retirement Accounts (IRAs)—basically a savings account with big tax breaks—gives people tax advantage. Although people under 50 can deposit only to a certain limit per year, the account still carries importance in terms of savings.
Similar to this platform is the 401(k) plan wherein an employee decides how much would be deducted from his or her payroll as contribution to an individual account that his employer creates on his behalf. The employer serves as the primary sponsor and partners with another company to manage the plan.
When people reach retirement, there are more ways to grow their accumulated savings, namely through stocks and bonds. Investing in stocks is as simple as buying shares of a company, making you a co-owner and gaining a portion of its profits. Stocks have high return potential and are beneficial for beating inflation in the long term. However, they also have greater risks in the shorter term.
Bonds, meanwhile, are a much more stable investment. Purchasing a bond is like lending money to a reliable borrower. The borrower pays interest on a regular basis and then recoups the principal when the bond matures. The downside includes the risk of the borrower defaulting and less potential returns compared to stock investment. For more convenient options, retirees can park their money in mutual funds, which are stocks- or bonds-based pooled investments managed by professional investment experts.
Linda O. Foster, a Washington-based financial expert, coaches her clients on the best way to reach their financial goals and enhance their retirement plans. For similar articles, subscribe to this blog.