Investing for Retirement

Retirement is a long ways away so most of us don’t worry about it much. Not knowing where we will settle down, what will the post-retirement expense, when will I retire, where will my kids be …

A lot of unknowns that cloud the objective to save for retirement. Even though the end goal is unclear here are a few pointers for those interested in socking away for the golden years.

Invest in 401(k)
If your company offers a 401(k) plan and matches part of your contribution – that is one of the best ways to achieve above average returns in your retirement portfolio. Think about the following scenario – - Your contribution - $1000- Company match - $200- Immediate ROI – 20%- Current tax implications – noneObviously this is a hypothetical example and real life scenario will be contingent on amount of company match, your contribution and finally market changes – but the fact remains that a company match is free money before taxes that should be counted as return on your investment.

Have an aggressive portfolio
If you are young and looking at a reasonable retirement time horizon (20-30years), be aggressive in your portfolio selection. Too much exposure to bonds and cash will hurt your ability to generate high returns. This is not the time to be safe but aggressive. Think emerging markets, real estate, commodities, developed markets and global economy. Many financial and bank sites offer age based investment model – check them out.

Reduce investment expense
Keep expense low. Regular expenses like management fee can eat away at your cumulative returns. Pick low cost investment options like index funds or low cost mutual funds. Each percentage point not paid in fees is money that works for you over the next 20-30 years.

Move from 401(K) to IRA
When you switch jobs – take your money with you. Rollover your 401(k) into an IRA. IRA gives you more investing choices. With a wider range of investment options you can pick low cost and more effective options.

Don’t pay off the house
The logic is simple. If your 30yr mortgage interest is 7% - that translates to about 4% after you account for the tax break you get on your mortgage interest. So your real rate is 4%. Now the question is – can you invest in a 401(k) before tax and make more than 4% over the long haul. Probably yes.

Review & revise
What is your rate of return? Are you averaging about 10% over the last few years? If you have no idea – that may be a problem. Investing is a long term game. You have to review, revise and take action periodically – every 3 to 6 months to make sure your plan is working. The gains you make today have a big impact on how your portfolio compounds in the long term. Time is on your side today – use it judiciously.

Get help
My 2 cents above are only my 2 cents. Don’t rely on my opinion and ranting – get professional help. Most large banks, investment houses and for-fee financial advisors can help you in this area. Use them to your advantage – get ready for retirement.