Three Ways to Invest for Retirement

With growing concerns about the status of Social Security and Medicare Programs, people are looking toward investments as a means of preparing for retirement. While most people are aware of the need to invest for the future, not everyone is sure how to go about doing it. Below are several ways you can start saving and investing for your future.

Enroll in an Employer-Sponsored 401(k) Plan

Enrolling in an employer-sponsored 401(k) plan is the easiest way to start investing for retirement. First, your employer does the bulk of the research regarding which investment firm to use and the products to invest in. Additionally, you fund your individual account by having your employer withdraw a certain percentage of your income, before taxes, and it happens before you ever see your paycheck. It’ also very difficult to access the funds once they’ve gone into the 401(k), and that means you are less likely to dip into your savings.

Also, you don’t have to be as knowledgeable about financial markets because you can pick certain options and the 401(k) will select the specific products. For example, you can select the option for moderate growth and low risk, and the 401(k) will distribute money in a plan that contains a preset selection of stocks and bonds that meet the necessary criteria. You don’t need to pick those stocks and bonds yourself.

Even in you put in the least amount of effort – using the default settings for your plan – you will still manage to save up for your retirement.

One of the biggest advantages to an employer-sponsored plan is that your employer also has the option to match some or all of your contributions. This means that if you contribute $50 out of each paycheck, your employer could contribute up to $50 out of its own funds, and effectively double your investment.

One of the biggest disadvantages to an employer-sponsored plan is that it’s attached to your employer. If you leave your job before retirement age, you can no longer contribute to the plan, and will no longer get the matching employer contributions. In fact, you will need to either close out the 401(k), or transfer it to another investment account.

If you close out the 401(k), the investment company will forward you what you have earned so far, and you will have to pay taxes on that money. If you transfer, or roll over, that balance into a new investment account, you won’t have to pay taxes.

Open Your Own Brokerage Account

Opening your own brokerage account is also fairly easy, but could be slightly more difficult than going with an employer-sponsored 401(k). You first need to open a brokerage account.

If you are rolling over an existing 401(k), you might be able to roll it over into your brokerage account and avoid paying taxes.

If you that is not an option, you can choose from one of several online brokerage options. If you are low on funds, you should consider a company that has no minimum deposit limits, such as a Sharebuilder brokerage account; that way you can start trading as quickly as possible.

The advantage to opening a personal brokerage account is that it’s all yours and goes wherever you go. It doesn’t matter where you work and, with online accounts, it usually doesn’t matter where you live.

The disadvantage is that you need to have a little knowledge about investing, and the financial markets, to know which products to invest in. However, some companies have financial advisors, and online tools, to help you make your decisions.

Also, unlike the employer-sponsored 401(k), you are solely responsible for depositing money into the account, and you don’t have matching contributions. You may also be responsible for taxes on your earnings; a financial advisor will be able to tell you what you might owe or how to lower your tax liability.

An IRA Account

An IRA, or Individual Retirement Plan, is similar to a 401(k) in that you are buying into an investment plan that has several options for you to choose from.

If you are rolling over an existing 401(k), you might be able to open an IRA with the same company that administered the retirement plan for your former employer, and roll those funds directly into the new account.

If you are short on funds some companies, like Fidelity, may let you open an account then turn it into an IRA when you have saved up enough.

Just as with the brokerage account, the biggest advantage to an IRA is that it’s not tied to a specific employer. Another advantage is that you get some tax breaks for contributing to an IRA. Also, you need to be more knowledgeable than you would be for a 401(k), although not necessarily as much as you would for a brokerage account.

The biggest disadvantage is that you need to have a certain amount of money to open an IRA, unless you are rolling over an existing 401(k). Also, you are solely responsible for depositing money into the account.

Regardless of which method you choose, it’s important to start saving for your future as soon as possible. Also, even if you have an employer-sponsored 401(k), you can still open a brokerage account or start an IRA for to increase your earning potential.