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Archive for the ‘Retirement Investing’ Category

Even if retirement is a far way off for you, it is important to start planning now and thinking about what you want to put away in your retirement fund. One of the questions that often come up from people planning for their retirement is whether to invest in annuities or mutual funds for retirement.

Annuities Explained

Annuities are a financial instrument offered by many insurance companies. They are basically a guaranteed investment indexed to certain investments made by the company from which the annuity is purchased. In short the annuity company will either pay you guaranteed annuity rates or base your investment on other types of securities like stocks, bonds, mutual funds, mortgages, or a variety of all of these and possibly other investments as well. Annuities offer a regular, often guaranteed-minimum income to the holder after a certain date, indexed to the aforementioned investments’ performance.

Mutual Funds Explained

Mutual funds, on the other hand, consist of units of a fund which is invested in stocks, bonds, and cash by a qualified manager. They are usually provided by banks or independent fund managers, and the institution providing the mutual fund may charge an annual fee to the holder, take a commission out of the mutual fund itself for managing it, or charge a trading fee, or a combination of any of these.

What’s the difference?

Both annuities and mutual funds are similar in that their payouts are indexed to underlying investments. The difference between the two investments is the coverage period.

An annuity is a sort of reverse life insurance policy. You pay into it while you are alive, and once you retire, it guarantees an income (based on specified annuity rates) for fixed periods of time until you die. The issuer of the fixed income annuities are betting that you won’t live a very long time so that they can keep more of what you paid into the annuity fund, so if an insurance salesman after looking at you is anxious to sell you an annuity over other products, perhaps it’s time to consult a dietician.

A mutual fund, on the other hand, is physical property which you own in the form of a security. It continues to exist, regardless of whether you are living or dead. On the other hand, there is no guaranteed minimum payout like you may get with an annuity.

So which is better?

Both annuities and mutual funds have their respective benefits and each person may find one more appealing than the other.

One of the major things to consider is investment expertise. Do you know what you are getting into when purchasing a mutual fund? Do you know how to evaluate the stocks it holds to see whether you’re buying a stable fund? If not, an annuity might be for you.

On the other hand, do you have a family to look out for which you wish to be provided for once you are gone? If so, a mutual fund may be preferable because it survives even after the holder dies, and is a part of the holder’s estate.

Some have worked most of their lives without thinking about retirement. Many have expected to draw on social security and maybe even a private company pension plan if they are lucky enough to work for a company that has one.

But is this enough to retire with? Inflation has severely reduced the value of social security payouts which have been under-indexed to the rising CPI, and the same can be said about private pensions. In some cases, businesses have gone bankrupt and pensioners won’t even be able to rely on a devalued payout from the pension when they retire because it no longer exists.

So what’s a soon-to-be retiree to do? Here are a few tips for people who find their selves investing late for retirement.

-Don’t overcompensate. If you take too much out of your budget to invest in your retirement portfolio, you may have to pay fees to quickly withdraw from it again due to the lack of enough expendable current income.

-Don’t put your money all in one place. The old adage, “Don’t put all your eggs in one basket,” is commonly known but equally commonly ignored. If you put everything in the “next best thing,” you can wipe out all of your savings quickly and end up having to return work.

-Take advantage of tax sheltered plans. Individual Retirement Accounts allow for tax advantages to individuals who use them. Don’t forget to consider the advantages of the two main account types: A Roth IRA can be used to invest with no tax break now, but no tax when cashed out in the future, while a Traditional IRA allows tax deductibility from the current year’s income with the money being taxed when withdrawn in the future.

What to Buy

An investment advisor may be the best person to advise you on what to actually put into your portfolio, but here are a few suggestions.

-Stocks. Stocks can grow both on equity or a dividend basis, or both. The main purpose of getting stocks is that they represent a board of businessmen fighting to improve the value of your holdings, provided you buy into a good company. These come with risk, so don’t hold your entire portfolio in stocks.

-Bonds. Bonds are guaranteed when purchased from the right issuer, but they may offer low returns, particularly due to the low interest rates set by central banks right now. Make sure to buy them in low inflation currencies like the Swiss Franc or the Japanese Yen, as the US dollar may depreciate faster than the interest accumulates on the bond.

-Precious metals. Precious metals can act as a hedge to inflation and are easily liquidated. Many banks can sell you these, but if not, check out www.kitco.com to mail order it.

Hopefully you now feel more confident about your retirement. With a few sacrifices now, you will be as well-off later as if you had started planning for retirement at age twenty.