Taking your first step into retirement is a big step and very much a step in the right direction. But, if you just searched for “retirement investing basics”, you are probably a newbie trying to get your feet wet in understanding the complex world of retirement investing. And, we want to help with just that! Below are basic retirement investing tools that you are going to come across as you try to learn the art of retirement investing.
At Money Looms, we have penned several articles on 401k investing. A 401k retirement plan is a plan where you invest a certain part of your paycheck towards your retirement. A traditional 401k allows you to save money on taxes by investing pre-tax dollars into your retirement kitty. However, when you cash it out, when you reach retirement age, you will have to do so after paying taxes. But, using sound investment techniques, your 401k can earn an impressive return over many years which will give you a cash-out return that will be far superior than the taxes you shell out.
There’s also a Roth 401k where you invest after-tax dollars. The obvious advantage to this is to be able to cash out your 401k without paying tax, in your retirement years. How is this a practical benefit? It is actually a huge benefit if you expect to be in a much higher tax bracket when you retire, for example, when you have many streams of income planned in your golden years.
Most people invest in a traditional 401k plan though. One of the major reasons why is employers generally match a certain part of your 401k contributions. For example, if a company offers to match 50% of your retirement savings, you can put down $300 towards your retirement every month and your company will pool in another $150 a month. That’s $450 a month towards your retirement. Companies match employee contributions to varying levels in a bid to keep them loyal and working for the company for many years.
There are limitations to how much you can contribute towards your 401k a month. There’s also penalties if you decide to cash out your 401k before your reach your full retirement age. You will find all such details in our posts on 401k.
Social security benefits
If you are paying taxes, you are paying a social security tax. These taxes will help you earn social security benefits when you reach the age of 65. You can even start to receive these social security benefits at the age of 62, although you will only be entitled to 80% of the benefits due to you.
If you take out your social security benefits at 65, you get 100% of your dues.
However, if you wait until 70 years of age before you start withdrawing your social security benefits, you actually get more than 100% of your benefits that are due to you. Waiting until 70 instead of 65 to start taking social security benefits will mean you receive 132.5% of your social security benefits that are otherwise due to you!
If you are healthy and have other forms of income that can sustain you until you reach 70 years of age, it makes a lot of sense to delay your social security benefit payouts and receive a higher benefit payout just 5 years later. You can read more about how to time your social security benefit payouts here.
Ideally, you want to start saving for your retirement as soon as you earn your first paycheck. Unfortunately, it rarely happens, at least in America. This is why it is imperative that you pay a lot of attention to retirement savings and start putting aside those savings as soon as you can, if you haven’t done so already.
Try the Money Looms reverse engineered retirement savings calculator to see how small lifestyle spending saves can actually contribute to a gigantic retirement egg. You can also read our post to understand how much you should have saved up when you reach important age milestones in your life. For example, how much should you have saved up at age 30, 40, 50 or even 60, with retirement just a few years away!
Annuities are very popular retirement investment products. But, you have to be very careful about signing up for a retirement annuity as they are notorious for having fees that will eat into your investment, sometimes right from when you sign on the dotted line!
For example, a broker can make as much as $2,500 just for making you sign up for a $50,000 annuity. The worst part is that his or her $2,500 will come right out of your $50,000 investment! Sounds scary?. Well, it should be!
The last thing you want to do is “invest” in a annuity when you are better off holding that money in a low interest savings account!
Besides pesky fees, you must also be very wary of surrender periods and maintenance fees that can all make annuities a very poor investment choice.
There are however several scenarios where investing in an annuity actually makes sense and a lot of sense. You can read a lot more about annuities in this Money Looms annuities post here.