Coming up with a money plan for your retirement is probably more difficult today than at many other times in the past. It is difficult not only because there are so many more options for saving and investing but also because there are many more variables that it is hard for the average individual to know about.
Although it’s a clich, it is also very true. The earlier you begin to plan for retirement, the easier it will be. If you are just starting out as a wage-earner it is important to see if your business has a retirement plan. If they offer any kind of matching benefit, put as much in as you can to get the maximum matching funds. My last job was very generous. They gave me 5% in my retirement fund if I did nothing. But if I put 4% in myself, they put in another 5%. That gave me 14% for my retirement and they were paying 10% of it.
If you don’t have a retirement plan or if you think it isn’t sufficient for your needs, you will have to create something for yourself. The easiest thing to do in the beginning is have some percentage taken out of your pay and automatically deposited in a savings account. Do some research. Some of the on-line savings accounts pay much better than standard banks.
After you begin to accumulate a little money, look into a Money Market account. They have all of the protection of a savings account but generally higher interest. The next notch up is Certificates of Deposit or CD’s. Again you have to do your homework and find the highest returns possible. Generally, you get higher returns if the deposit is higher and if the length of the CD is longer. With a CD, you put your money into an account for a certain length of time and leave it there until it matures. The time is usually six months to five years. Removing your money before maturity will result in hefty penalties.
It is recommended that you “ladder” your CD’s. It’s a bit dangerous to put your money in a five-year CD, for example. You may get the highest interest rate at the time, but what if the interest rises in a couple of years. You’re stuck with your CD for five years. Laddering means buying several CD’s with different maturity dates. Let’s say you get a one-year, two-year, and three-year. When the one-year matures you can buy another three-year. Your two-year is now set to mature in a year and your three-year in two years. You can set it up so that you have one CD maturing every year.
If you want to move on from these relatively safe investments, you can pull some of your money out of your CD and look into something a notch more risky. That would be mutual funds or Exchange Traded Funds (ETF’s). Mutual funds are safer than buying stocks because the risk is spread around. A single mutual fund will have a number of different stocks in it so it isn’t dependent upon the success of any one stock. It might follow an index of stocks like the S&P 500 or the Dow. It might follow a single industry such as energy or commodities. Do your homework and look at the history of any fund you’re interested in. Look at the economy and ask yourself what is on the rise and what is declining. Right now, housing is falling and commodities are rising. Let these trends be your guide for now.
ETF’s are similar to mutual funds in the sense that they can contain a basket of stocks, usually following one industry or an index. Some are more narrowly defined such as the newer gold and silver ETF’s. These are sold like stocks and require that you have a broker.
You can also look into bonds and do some research on where they stand at the moment. Bonds are very much connected to the economy and can move with some swiftness over changes in the economy. Do your research and due diligence and maybe put some of your money in short-term bonds at this time.
The next step in risk and possible higher returns is investing directly in the stock market. This is a subject that is too vast to be included here. Now you’re playing with the big boys and you’d better do your homework. Just a word of advice. Don’t always believe the experts. They are sometimes trying to sell you something. Do your homework. Good luck!