Retirement savings
Human life has three stages. These are the child hood stage, adult hood stage and the elderly stage. At the child hood stage, one is very dependent on his parents or guardians. We become independent at the youthful stage, onwards. Later in life, we become weaker and unproductive economically. Therefore, it is vital for any one to secure the future when we are strong and productive. We achieve this by ensuring that we invest heavily in projects and plans that will yield returns in the future after we retire.
An individual requires five things, for him to retire happily. They are; money, good health, a family, friends and lastly, engagement activities. There is no doubt that every body who is currently working will eventually retire. For this reason, it is crucial for us to start planning for retirement. Any time is right to save or invest for your future life out of work. However, the earlier one starts investing, the better it is for him.
We may consider a case such as of an individual, at the age of 39 years. He works. He earns $6250 per month. He expects to retire at age sixty seven. He desires to have an income of 70% monthly after retiring. His anticipation for pension ranges at three thousand, five hundred dollars per month. He also expects his social security to be ten thousand dollars. According to the online calculator, this individual will need $18,660 as he will retire at 67 years. This amount is equivalent to$7,952 in the current dollars. Under normal circumstances, a person needs 70% only of what one has been earning before retiring. Unfortunately, especially if one has a health problem; or mortgage or if one has any other project that is expenditure intensive. Such a situation might need one to raise 100% or more, of your preretirement monthly salary.
This implies that if he were to retire at a time like this, he would get a lump sum amounting to $7,952 from the social security. He would also continue to receive $3,500 dollars monthly. This knowledge is particularly crucial to the person who is saving. This is because it enables him to project how his future economic status will be. If one fills displeasure in his post retire earnings, he my chose to change his saving strategies.
Asset allocation deals with portfolio management. A portfolio mix refers to the way an individual distributes his investments. A potential investor or saver has a choice to save his money in one or more savings strategies. A wise man does not invest blindly. He considers so many factors in order to make the best choice at his disposal. Some of these factors include his current economic status, his health status, his dependants, other investments if any and most importantly, his income. The motive is to have optimum comfort and satisfaction at ones old age.
Assets are properties that a person owns. They may be tangible or intangible assets. Assets must be measurable in monetary terms. There are many classes of assets and strategies. We have cash or cash equivalents. These consist of deposit certificate and money market funds. We also have bonds, stocks, commercial real estates or residential real estates and natural recourses such as agriculture. The most common retirement security strategies are the insurance products, like the life insurance products. Previously, we had discussed a scenario of a 27 year old man who earns a monthly salary of $6,250.
He says that he will need the investment benefits after a period longer than twenty years. He adds that he can handle a reasonable amount of risk. He also asserts that if he misses his goal by one or two years, he would be okay. He argues that market sell-offs present an advantage to buy more stocks. With this information, the asset allocation software shows that it is wise to invest in a portfolio mix of four strategies.
10% of his total investment should be on bonds.50percentage should be invested on large capital stock, 20% on foreign stocks and 20% on small capital stock. This asset allocation maximizes the returns, whereas it minimizes the risks. Therefore, he will be able to realize his retirement goals.
Given that he will need $19,945 to retire, he will receive that money in one installment, thus sustaining him in the short run. The small capital stocks will also accrue benefits in the short run. He will also be getting returns of $1000 every month. However, it is essential for him to invest in long term investments given that he is a young man. Large scale long term investments have a high rate of returns. Never the less, they are risky. It is clear that Growth funds have the highest potential reward, as well as risk. Growth and income is second, followed by equity income, then the balanced fund and eventually the bond fund. As a young person, he should aim at gaining the highest returns to ensure that his retirement savings keep growing, and remains ahead of his inflation rate.
When he grows old, he shall invest in less risky investments to protect his savings. What he has already saved. That accounts for his 50% investment on large capital stocks, 20% foreign stocks and 10% on bonds. Basing my argument on the amount of funds he would require to retire, I advise that he invests his retire savings with IRAs. These are Individual Retire Arrangements. The Roth IRAs particularly are the best. My opinion is because of the benefits that those who join these organizations gain, that others do not get.
The Roth IRAs forms under the American law. Members get tax breaks on withdrawals of money from the plan after the retirement time. Unlike the traditional IRAs, Roth IRAs have a flexible tax structure. In addition, Roth IRAs have limited withdrawal restrictions. The converted contributions are ready for withdrawal after the seasoning period, which is five years. More over, if the immediate beneficiary dies, and his wife is also a holder of a Roth Irish can combine the two accounts without any penalty. His assets can as well be passed on to his heirs.
Basing my argument on the asset allocation results, which is the best in this case as the person in question is young; he should invest in stocks and bonds. The reason is that they are flexible. Because of this, he keeps changing from company to company depending on how they pay interest. This involves a higher risk as well as high returns.
Among the risks, that one is likely to face frequently. The first one is the default risk. This occurs when a company goes in to liquidation. Since ordinary shareholders are the last to look at, and paid the residue value, which might not be there. In the stock exchange markets, share prices keep on fluctuating, thus the risk in investing in them. Companies are prone to market forces and information asymmetry.
Internal board politics that, in most cases, emanates from the management buy out. This results to portraying a poor public image, which affects the perception of the shareholders and potential investors in the capital market. This can be truly disastrous since when such a perception affects the share price adversely, which devalues the investment. Lastly investing in international stocks has its own share of risks associated with it. This comes as a result of the sovereignty issues incase of external conflicts where citizens of the enemy country’ assume an enemy character. This comes into play when the countries involved are at war or are experiencing bilateral diplomatic rows. This affects the value of investments of foreigners adversely. However, I would suggest that the investor invests in long-term investments regardless of the risks involved. He is young, and so, he has sufficient time to venture in to the high returns earning investments. H e should change from one form of investment to another until he gets the best deal possible.
References
Fishman, S., & Nolo (Firm). (2012). Home business tax deductions: Keep what you earn. Berkeley, Calif: Nolo.
Stim, R., & Warner, R. E. (2008). Retire happy: What you can do now to guarantee a great retirement. Berkeley, CA: Nolo.
Fishman, S. (2012). Deduct it!: Lower your small business taxes. Berkeley, Calif: Nolo.
Parrott, H. (2011). Seven steps to financial freedom in retirement. Hoboken, N.J: Wiley.
