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10 Of The Best Retirement Investments

February 4, 2013 by Karl Leave a Comment

Pay here

Like most people, I am saving in a number of ways toward retirement, with one eye on what might be the best investments for retirement, when I get there. On the way, of course, there are 401 (k)’s, Roths, and various non-traditional routes available to most of us.

For example, target date mutual funds take the stress out of cutting risk toward retirement by naturally moving out of stocks the closer the investment gets to a set retirement target date: perhaps among the best investments now for the passive investor.

With treasury yields well below 2%, the stock market exhibiting renewed volatility, and returns on cash non-existent, investors are also turning to alternatives such as real estate, exchange traded funds, and energy commodities. And on the list of possible investments are also high yield corporate bonds and, perhaps, some emerging market sovereign bonds.

But, what about when you come to retirement itself – what options are there to produce the income needed throughout a, hopefully, long and healthy retirement?

What is the best investment for retirement for you will depend upon your individual situation, of course, but as income producing options any of the following ten could be used as stand-alone solutions or in combination. The point is there really is a wide range of choice when it comes to the best retirement investment to suit income need and attitude to risk.

These 10 best retirement investments are listed in no particular order.

Single Premium Immediate Annuity (SPIA)

This will provide you a guaranteed income, and can be structured so that the level of income grows with inflation or at a pre-set rate. Annuities give you certainty of income for the remainder of your life though once you’ve paid your money in you can’t withdraw any of that capital: it’s now the property of the life company that has issued the annuity. This means that there won’t be any money from the annuity for your loved ones when you die, and that can be a disadvantage too far for many.

Variable Annuity

When you buy a variable annuity, you are buying a portfolio of investments. You choose these, of course, but it does mean that the return achieved, and therefore any income, is dependent upon the performance of the portfolio. This is different to an SPIA where the income you receive is guaranteed by the insurance company.

Bonds

Government or corporate debt instruments (bonds) will pay you interest on the amount you lend for the lifetime of the bond. When the maturity date is reached, your capital is returned to you. Though such bonds are often marketed as having your capital guaranteed, the guarantee is only as good as the financial condition of the underlying company or government.

Property

The attraction of property is that it will give you a rental income – whether residential or commercial – and may increase in value. This last point, of course, used to be taken as a guarantee: the property market crash of 2006 – 8 dissolved this misconception. But being a landlord has drawbacks: there will be maintenance costs, for example, and it’s not unknown for tenants to mysteriously disappear.

Cash and cash lookalikes

This covers bank savings accounts, certificates of deposit, treasuries (bonds issued by the U.S. government), and money market accounts. Such investments are among the safest available, but consequently offer among the lowest returns. Your income might not keep pace with inflation, but your capital should be safe.

Retirement Income Funds

This type of fund allocates your cash across a range of stocks and bonds, and pays you a monthly income. One of the major attractions of this as a retirement income producer is that you can still access your principal – unlike an annuity. But it has to be remembered that any withdrawal will harm the income you get.

Closed End Funds

Producing income monthly, quarterly, or annually, these funds can cater for different investment objectives and risk profiles. They are run by professional managers who will seek to invest in instruments that pay dividends or interest, as well as utilizing covered call options and warrants. There are plenty of positives with these funds, though it has to be remembered that, however it’s packaged, risk is still risk.

Dividend Income Funds

A managed fund that aims to pay an income from the dividends it receives from a portfolio of dividend stocks. Though diversified across a number of stocks the diversification stops there. Investing solely in such a fund will give exposure only to the one asset class, and thus the risk profile could be pretty high.

Real Estate Investment Trusts (REITs)

REITs are funds that own real estate. They do everything you would do were you to own the property direct, and then pay income to you, the investor. There are rules stating how much of their profit they have to distribute to shareholders (90%), but, like dividend income funds, used without other investments they might be considered to overexpose to a single asset class.

Your Own Portfolio

Creating your own portfolio, or having a financial advisor do it for you, will give you the greatest flexibility of investment. It is possible to invest in a diversified portfolio of stocks and bonds, designed to give a good long term return. A disciplined strategy should allow you to benefit from set withdrawal rates allowing you to take between 4% and 7% each year.

Conclusion

There are now more options for an investor to create income in retirement than ever before. This offers you greater flexibility and choice of funds, style of investment, and asset. However, it has to be remembered that relying on a single source for your income may not be the best investment for retirement.

You should also remember that investment markets are a fluid and ever changing beast. What might be among the best investments now may prove to be among the worst performers in twenty or thirty years’ time.

Filed Under: retirement

How Much Money Do I Need to Retire?

February 1, 2013 by Karl Leave a Comment

Retirment cashThis is a question that I hear regularly from the baby boomer generation now they are edging toward retirement. Of course, what we all actually mean when we ask the question is ‘how much do I need so that I can live the rest of my life in comfort?’

It is, in reality, an almost unanswerable question. There are so many unknowns that need to come into the equation that the best we can do is look behind us in order to peer into the future.

What we all wish we knew

According to the US Labor Department, inflation cost 39% of purchasing power in the twenty years between 1991 and 2011. In other words, $100 in your pocket in 1991 would only be worth $61 now. Put another way, to buy the same amount of goods today as you could with $100 in 1991 you would need $163. Just imagine having retired in 1991 on a fixed income, and trying to survive now on the same number of dollars in your pocket as you did back then.

Many retirees purchase annuities to provide income in retirement. These pay income on a regular basis, and can be structured so that the income increases in line with inflation.

However, the rate of return depends upon interest rates – as well as a number of other factors – at the time the annuity is purchased: when interest rates are low, so too is the return on an annuity. Unfortunately, we don’t know what returns will be when we retire. If a return of 5% is paid on an annuity and you require $50,000 per year to live on, then you’ll need a pot of $ 1 million to purchase that income producing annuity.

Others rely on the return on investments that can be achieved from a portfolio of stocks and bonds. Prevailing rates of return are the key here. Stock dividends of around 2% have hardly been enough to produce great returns over the last 10 years or so while major stock market indices have stagnated. Meanwhile, yields on corporate and treasury bonds are at historic lows.

If you assume that inflation averages around 3% over the next 20 years and your portfolio returns 5% per annum, according to BTN Research you’ll need a lump sum of $196,000 for every $1,000 of monthly income you need. If you expect to live 30 years in retirement, this number goes up to $269,000. So if you want $10,000 per month through 30 years of retirement, you’ll need $2.69 million when you retire.

So, there are many variables that we need to take into account when we are planning for retirement, almost all of which we can only guess at until retirement is upon us.

Other things to consider

How long do you plan to live in retirement? This may sound like another unanswerable question, but you have to have a basis on which to invest for your retirement and this is the first call you need to make. The longer you expect to live, the more money you’ll need to produce the income you need – planning for a lifespan after retirement of 10 years, and then surviving 20 will be catastrophic to your later life finances.

Social security payments are wide ranging at the moment. But that doesn’t mean they will still be available in 10, 20, or 30 years’ time. Social security is an unfunded program, paying benefits out of taxes collected from workers. In the future there is likely to be fewer workers supporting greater numbers of an aging population.

At present day demographics, there are around 7 workers supporting each retiree. It’s estimated that by 2050 this ratio will be down to 2:1. With numbers like these, it really is best to discount any potential social security benefits available in retirement, because they probably won’t be.

If you have a lump sum at retirement and invest in the investment markets, your return will be based upon the price of the market when you invest. What this means is that if you invest when the markets are low, your investment returns will be higher than were you to invest when the markets are high. Timing of investment is crucial when it comes to retirement.

So, how much do I need to retire?

It would seem that the answer to this question is a constantly moving target. There are so many variables and so much uncertainty, and none of us have a crystal ball. But all is not lost, because there is one way to accurately answer the question how much do you need to retire:

You need enough to be able to live.

Consider this. If you spend $570 per week, or approximately $2500 per month, you’ll need about 25 times this amount to generate the income you need through your retirement. This is based upon the rule of 25, which says a realistic long term return of 4% on investment can be achieved (after inflation of 3%).

So, if you spend $30,000 per annum ($2500 each month) you’ll need a pot of $750,000 to satisfy this requirement. But, if you can reduce spending by $1,000 per month then you’ll need $300,000 less. Reducing expenditure has a massive payback.

Or you could use the 4% rule

The 4% rule says that you should withdraw 4% of your retirement fund in year 1, and then follow that by increasing for inflation every year thereafter. This rule also assumes a 4% real return, just like the rule of 25, but gives an increasing amount of income.

You only have to calculate the 4% in the first year, and then each year you adjust the amount withdrawn for inflation. Assuming you have $750,000 in your retirement pot when you retire, your first withdrawal would be $30,000. The following year, if inflation is running at 3%, you would withdraw $30,900 irrespective of investment performance.

Of course, this might be more than 4% of your portfolio should your investment perform poorly: but sticking to 4% rule means you don’t need to worry about this. Or, at least, that’s the theory.

In summary

The real answer to how much money to retire is needed is, in truth, as much as possible. For those of us that fall short of this ideal, then a certain degree of budgeting will be necessary.

But perhaps the secret is to begin planning as early as possible toward happy years in older age, making the most of pension investment opportunities and tax breaks as we work, and save, toward a long, healthy, and wealthy retirement.

Filed Under: retirement

Rising Dividend Stocks: Creating income, securing growth

October 5, 2012 by Karl Leave a Comment

Many investors want to create an income from their investments, perhaps to meet the expenses of everyday life, pay for a child’s education, or meet mortgage payments without reducing capital. Other investors look for capital growth, but want to achieve this with a cautious outlook.

Often, fixed income investments are recommended to these investors. Cash bonds and treasury securities, for example, give a steady and known return with safety of capital.

But the level of income won’t increase from a fixed income security, and the rate at which the capital grows when interest is reinvested is unlikely to make one rich in any length of time. This creates problems for both income and growth seekers.

Inflation will take its toll

It may be comforting to have a known and steady stream of income from a fixed income investment, but when it comes to inflation then an investor needs to take into account the decreasing purchasing power of his fixed rate income over time.

For example, a fixed income investment of $50,000 that pays interest of 2.5% per year will yield $1250 each year that it remains invested. In 10 years, the annual income will still be $1250. Perhaps an investor who bought such an investment ten years ago did so in order to pay his electricity bill. But with inflation running at an average of 2.5% per year, the investor’s electricity bill will be $1600 now.

The $50,000 bond investment no longer pays enough income to satisfy the investor’s electricity bill.

Rising dividends combat inflation

Now consider the investor who invested his money in ‘ABC’, a business that generates and sells electricity and paid shareholders a dividend of $1.35 (a yield of 4.5%) ten years ago. He invested enough money to generate $1250 in income to pay his electricity bill, also.  His total investment was $27,750.

In fact, it turns out that ABC has increased its dividend for 10 consecutive years, and by an average of 4%. The dividend he was receiving on each share is now $1.95. At the time he made the investment, his dividends paid his electricity bill. Now they give him an income of $1850. Perhaps even better, the investment he made into an electricity company is paying his electricity bill, and more besides!

What about the capital value of the shares?

It’s true that share prices can fall as well as rise, so the value of the shares of a dividend stock could indeed have fallen over the duration of the investment. But dividend stocks that raise their dividend year on year tend to rise in price, for the reason explained below.

The first point to note, however, is if the investor were investing for income there is an argument that says the value of the investment is a secondary consideration: dividends are paid per share, not per dollar as interest is. If dividends are rising, and income level following suit, does the value of the investment matter?

Second, however, is this: the stock has been bought in the first place because of its yield: if the dividend keeps rising, then it is likely that the stock will continue to be bought for the yield. This will create buyers that will support the share price.

Consider the stock ABC in the example above. The yield had remained unchanged throughout the term, but the dividend had increased from $1.35 to $1.96. So the share price now is $43.55. The investor’s original investment has increased in value, as has his dividends. It is the increase in dividends that has driven the increase in the value of the shareholder’s investment.

Look for stocks with rising dividends

To protect against the effects of inflation, and give a rising income when it’s needed, an investor could invest in rising dividend stocks. But the rising dividend and high yield are not enough to make the stock a buy.

An investor should also look at the rate of growth of the dividend and the history of that growth. Companies that have a history of raising the dividend year on year are more likely to continue doing so.

On top of this, of course, the business itself should be on a firm footing. Is the dividend cover sufficient for dividends to continue to be paid? Does the company have a good cash flow? Are there legislative or competitive issues that may hamper earnings growth in years to come? What is its debt position? All these questions and more should be addressed before committing to an investment.

A good place to start the search for potential dividend candidates is to google for dividend aristocrats (those stocks that have a 25 year history of raising dividends) and dividend achievers (which have a 10 year history of consecutively rising dividends).

A company that raises its dividend is not only rewarding its shareholders but also indicating its confidence in the future, and its potential for on-going profitability. But before making an investment, you should conduct a level of research that produces reasons for owning the shares other than a good dividend paying policy.

Not all those companies that have a history of increasing dividends will continue to do so. Some investors will argue that a dividend stock should never be sold. But, perhaps, when a company that has raised its dividend for 20 years or more suddenly does not do so, or even cuts the amount, it is a sign of changing fortunes that should not be ignored.

As with any portfolio, although a dividend stock portfolio creates a passive income that can be reinvested easily, it should be managed and monitored on a regular basis. Keeping on top of individual constituents, and maintaining proper diversification, will help to ensure those dividends keep on rising and your income beats inflation.

And finally, on a side note, a special thanks to tiethemoneyknot.com and walkingtowealth.com for including me in the recent carnivals.

Filed Under: Education, Making Money, retirement

Is a Gold-Backed IRA Right for You?

July 22, 2012 by Karl 2 Comments

Having an IRA – an individual retirement account – is always a good idea for anyone other than a multi-millionaire. This is because it offers a pretty easy way to grow your retirement nest egg over the span of your career, using tax advantages to make saving even more advantageous.

There are many types of IRAs, as defined by the type of assets you use with your IRA to invest. One particular type is a gold-backed IRA – an IRA that is valued based on gold, instead of stocks, bonds, mutual funds, or other assets.

Converting to a gold-backed IRA may or may not be right for you. I’ll give you the basics of pursuing this particular type of investment strategy so you can determine whether or not this is the right move for you.

What is a Gold-Backed IRA?

A gold-backed IRA is one form of a precious metals IRA, which have been in existence for decades. According to federal regulations, you can opt to fund your IRA with precious metals instead of U.S. dollars – but the metals have to come from an approved list from the federal government. As you can imagine, gold is on the list (so are silver and platinum).

There are a few things that make a gold-backed IRA different from other plans. For starters, these IRAs are self-directed. This means you make the decision as the account holder. A related difference is how you maintain assets. Stocks exist in the digital world; gold doesn’t. You have to actually keep physical gold and arrange storage for the gold through an investment firm (called the custodian or trustee by the IRS). As a result, you’ll have to pay a custodian fee that can cost $100 to $200 a year.

You also have to buy certain types of metals. Gold, for example, must be in the form of 24-karat gold bullion bars with weights between 1 ounce and 400 ounces. Foreign gold coins are now accepted, though, as are American gold coins.

Finally, factors that influence the value of gold are different from – and mostly opposite of – those that impact the value of stocks. Generally, when stocks go up, gold goes down, and vice-versa. In this way, gold is a hedge on stocks and the U.S. dollar. (That last part is important.)

Regal Assets are a company who offer Gold IRAs. They offer a free starter kit that explains it much better than I can, though feel free to hear me try further down.

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Disclosure: If you are on this website you have been sent or referred here by an affiliate, agent or partner who is promoting Regal Assets. All affiliates, agents and partners are compensated for referrals.

Why Invest in Gold?

Gold, as I mentioned, is often a hedge against falling value in the stock market or in the U.S. dollar. When panic or uncertainty sets in, people tend to turn to gold because it is viewed as a safe store of value. People will always want it, in other words, while they may be turned off to having dollars that are prone to inflation, or stocks that can lose value in the blink of an eye.

You may have noticed gold’s meteoric rise over the past decade that has coincided with the end of one stock market-triggered recession (2000-2001) and another, deeper recession (2007-2010). Over the past five years, the stock market lost over half its value at one point, and the dollar took a shelling too. As a result, gold has soared from roughly $300 an ounce to a peak of $1,896.50 per ounce on September 5th, 2011.

Gold has retreated from that peak, but still remains well above the $1,550 mark. There are claims floating around that gold will peak above $2,000 per ounce in 2013, but even if the price falls a bit and settles, it could still serve another key function: guarding against inflation.

Is a Gold-Backed IRA Right For You?

If you want to keep inflation at bay, maintain the store of value of your money, and possibly benefit from an upside in gold in the future, a gold-backed IRA may be for you. They’re not inherently more complicated than any other IRA, and involve far less decision-making than, say, an IRA with a stock portfolio that has to be monitored and balanced.

Of course, there are downsides. The growth potential for a gold-backed IRA isn’t as high as one based on stocks, simply because it’s hard to predict what gold will do over the next 10-30 years – approximately how long you’ll have your IRA. Remember: with the exception of a period of time around 1980 and the last five years, gold has hovered between $200 and $500 per ounce for the last 36 years. Plus, with a recovery underway – albeit a slow one – there is downward pressure on the price of gold that many investors either don’t see or aren’t willing to acknowledge.

Plus, when you go all gold, you are putting all your eggs in a gilded basket. Stocks, bonds, mutual funds, and CDs allow you to at least diversify your portfolio.

One option may be to include a portion of gold in your IRA – say, 15% for optimal protection against inflation. You can still benefit from capital appreciation, but you can also fend off inflation that could rise at any moment.

Filed Under: retirement

Saving for Retirement: 401ks, IRAs, and the Roth IRA Explained

July 9, 2012 by Karl Leave a Comment

Saving for retirement is a big deal. If you don’t believe me, ask anyone who is at or past retirement age and still working not because they want to, but because they must. The earlier you begin planning and saving for retirement, the better off you’ll be – and that means understanding and taking advantage of the various options out there for the choosing.

The main choices today are 401k defined contribution plans, traditional IRA retirement savings plans, and Roth IRA plans. Here, we’ll talk about each one and explain the pros and cons for each so you can make an informed decision.

401ks Explained

A 401k is what is called a defined contribution plan. In other words, it is a type of retirement savings plans that has a defined contribution from not only you, but your employer. Under this plan, a certain amount of pre tax dollars from your monthly pay is taken out and placed into your account. This money is matched by your employer up to a certain amount; together, the combined total is then used in a portfolio of investments so that the total value grows over time.

This is called a tax advantaged plan because you gain a tax benefit by using it. Because you get to use your money before taxes are automatically deducted, you can grow your assets a lot faster than you would if you had taxes taken out first. For example, growing $1,000 at 5% per year will accumulate more money faster than growing $700 at 5% per year. Taxes are taken out when you start withdrawing your money, but by that time, when you retire, it is possible that you will be in a lower tax bracket than what you are in now.

Your Annual Contribution Limit

There is a limit to how much you can contribute per year. For the 2012 tax year, you can contribute $17,000 per year from your pay. If you are 50 years of age or older, you can also contribute $5,500 in what is called a catch up contribution.

Your Employer’s Annual Contribution Limit

Between you and your employer, you can contribute a total of $50,000 in 2012. An employer can contribute up to $33,000 per year, or 100% of your salary (whichever is smaller), although the vast majority of employers do not max out contributions. Most provide for anywhere from 3% to 6% of whatever you contribute. At an average rate of 4.5%, that means they give $765 per year – which doesn’t seem very large. Every bit helps, of course – and that’s essentially free money.

For more information on contribution limits see:

How much can I contribute to my 401k per year?

When Can You Withdraw It?

Most people cannot withdraw from a 401k until the age of 59 ½. Otherwise, you will owe taxes and a 10% penalty on the amount. There are certain exceptions that allow for penalty free withdrawing, such as if you become disabled or take out a loan against your 401k and repay it with interest (to yourself).

More articles on withdrawing:

When do I have to take money out of my 401k?

Calculating 401k early withdrawal penalties

Can I get money out of my 401k without penalties?

Benefits and Drawbacks

The big benefit of a 401k is free money, a.k.a. employer contributions. Plus, you get to use pre tax dollars, which is always good. The disadvantage is that the plan is tied to your employer, and there are usually vesting requirements. Plus, there are costs associated with managing a 401k, namely because they are expensive to administer.

More information on 401ks:

Where can I put my 401k rollover to gain maximum returns?

How much will the tax be on cashing out a 401k?

Where should I invest my 401k?

Can you invest in both an ira and 401k at the same time? 

Is a Gold-Backed IRA Right for You?

Traditional IRAs Explained

Another common option is an individual retirement account, called an IRA. There are two types: traditional IRAs and Roth IRAs. I’ll start with the traditional one.

An IRA is a private retirement account that isn’t connected with an employer. This means you lose the employer matched contributions, but gain independence and flexibility. Otherwise, it is very similar to a 401k in theory and practice.

With an IRA, you contribute a certain amount of pre tax dollars into your account. This is then used to invest in a pool of assets. After a certain time – 59 ½ years of age in most cases – you can withdraw your money without paying a penalty.

These accounts are held by banks, financial institutions, or brokerages and generally allow investing in a wide variety of assets, such as stocks, bonds, mutual funds, certificates of deposits, money market accounts, and other classes. Your contributions are not taxed before you make them, and any contributions you make are tax deductible.

Your Annual Contribution Limit

For 2012, you can contribute up to $5,000 annually in your IRA. If you are 50 years of age or older, you can also give a $1,000 catch up contribution.

When Can You Withdraw It?

As with a 401k, you can withdraw money once you reach the age of 59 ½. Doing so before then is cause for a 10% penalty. There are exceptions, like your disability or death, using $10,000 for a first time home purchase for you or a family member, unreimbursed, out of pocket medical expenses, health insurance or higher education expenses, and annuity payments.

Benefits and Drawbacks

The biggest advantage of a traditional IRA is the fact that contributions are tax deductible. Drawbacks include the fact that you must withdraw after the age of 70 ½; otherwise, you are faced with penalties. Plus, there are eligibility requirements as far as income goes that determines how much you can contribute and if you can contribute at all. Finally, unlike with a 401k plan, you cannot take out a loan against your IRA.

Tax treatment of inherited ira accounts

Can I use an ira to pay off debts?

Do I pay taxes on a roth ira withdrawal of my original funds?

Can you use ira accounts as collateral?

Roth IRAs Explained

The other type of IRA is a Roth IRA. This is similar to a traditional IRA, with a few notable differences.

One major difference is that Roth IRA contributions are made with after tax dollars, meaning you already pay taxes before you put in money. If your tax rate is lower when you begin investing than it will be when you retire, that is a benefit; you’ll pay less in taxes than if you had to pay taxes when you withdraw money at retirement under a traditional IRA. This is because you do not have to pay taxes when you withdraw your money.

Another difference is that there are generally fewer restrictions on withdrawals, and earnings are not subject to tax. This is only if distributions are made after five years have passed, and you are at least 59 ½ years old (or if you meet an exception due to disability, death, medical payments, higher education expenses, etc.)

Drawbacks

Your taxes paid are not deductible, as with a traditional IRA. Plus, there are income eligibility limits that restrict how much you can contribute based on how much you make. Additionally, your contributions do not reduce your taxable adjusted gross income like a 401k or a traditional IRA.

In the end, you should consult with a qualified financial advisor to find the perfect plan for you. Learn about the various ins and outs and find a plan that fits your needs and financial situation. There’s also no rule that you have to pick just one; you can contribute to a 401k and an IRA if you so choose (and many do).

Filed Under: retirement

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