Planning
your investments to build a retirement fund can be a dizzying
prospect. The various questions and options and details and accounts
and amounts are enough to make anyone’s head spin. Wouldn’t it
be nice if there was a generic recipe for success? A nice neat list
of step by step instructions on how to make the best decisions on
where, when and how much when it comes to investing for your
retirement. Unfortunately, this list of steps is incredibly
dependent upon each individual and their current situation and future
plans, so a sure fire success route doesn’t exist.
But
before you stop reading, there are a few broad steps that most
financial professionals agree will most likely lead you down the
right path. By investing your money in retirement accounts by the
priority of which will give you the most return, you can take
advantage of what each has to offer. Here’s the order that is
suggested for the majority of people in terms of retirement accounts.
- Fulfill Your Company’s Match Program: The exact amount of this will differ for each individual depending on the company that they work with, but whether you have a 401K or a 403b, the best place for your money is in those accounts reaping the assistance of your employer. Match programs offer a two for one that is too valuable to turn down. Before you invest anywhere else, make sure you are investing enough in your 401k or 403b to get your full match.
- Roth IRA to the Max: There has been a long standing battle between the Traditional IRA’s and the Roth IRA’s. When it comes to your retirement planning, your Roth IRA should win this battle. There are a few different reasons why you should make this move. With the current economy that we have all been hearing so much about, we can assume that taxes will go up in the future. Investing in a Roth allows you to pay taxes on your income now, and avoid the higher tax rate as it grows and in your retirement. Also, investing in an IRA gives you more choices and flexibility than is offered in many 401k plans. You can decide where you want to open your account based on your personal preference or individual situation. This step of maxing out a Roth IRA can change based on the individual though, as some people cannot open a Roth IRA because of their income level.
- 401k or 403b to the Max: After you have reached your company’s matching level and have maxed out your Roth IRA, turn your funds back to the 401k or 403b until they are maxed out as well. Having both your Roth IRA and your 401k/403b maxed out gives you some variety in your portfolio in terms of how the investments are taxed. This variety gives you something of a safety net in terms of how taxes and other investments change over time and the effect they will have on your funds. As a side note, when you plan to max out your 401k or 403b, keep your eye on the ever changing contribution limits which vary each year.
- Open Taxable Accounts: If you have filled in the previous three steps, you will find yourself at the final, and most open ended step of the journey. The options here are almost endless in terms of what kind of account to open and where to open it. You can invest with a mutual fund, a brokerage account, or one of the many other options out there. Your decision depends on the type of risk versus reward balance you are looking for, whether you are looking for the simplicity of joining a service or are looking for more of a hands-on approach, how much you are planning to invest and so on. Because you have the foundation laid by maxing out your 401k/403b and your Roth IRA, you can afford to be a little creative with this last decision.
This
plan is not something to jump into without doing your homework. Like
mentioned before, there is a reason that no one has created a perfect
plan that fits everyone. Depending on your personal income, you
might not be eligible for certain funds, like a Roth IRA, or you
might be eligible for some accounts that could take higher priority,
such as a SEP IRA. But, for most people, looking for a general order
of priority for their retirement investments, these four steps are a
great place to start.
This
material was prepared for Rick Ray by Financial Social Media
(http://financialsocialmedia.com/).
GEAR 2012-8368
GEAR 2012-8368
