Regardless of the numerous uncertainties that the future brings, retirement is one constant fact that looms in the distance. However, if you plan for your retirement well enough, then this period of your life may not be so uncertain after all. It’s not just enough for you to set your finances in order so that you could retire in relative comfort. Part of planning for your retirement also includes knowing when you will, or would want, to retire; where you will live when you do retire; and what you would fill your time with during that time.
When should you start saving for retirement?
The best time to start saving for retirement is as early as you can manage. The reason for this is because when you start contributing to your retirement fund earlier, the power of compounding allows you to make more out of your money. Stocks, mutual funds and employer-sponsored retirement funds need ample time to give you a significant nest egg since the longer that your money works for you, the more you make in the end. However, it is never too late to start saving for retirement even when you’ve already missed the early train, so to speak.
What is a 401(k) and other company plans?
401(k) is an example of an employer-sponsored retirement plan. On top of 401(k), there is also 403(b). When you take advantage of such retirement plan, you get automatic savings as well as tax incentives to save for retirement. In most cases, these employer-sponsored retirement plans also offer matching contributions.
The great thing about saving through a 401(k) account is that your contributions are tax deductible or you can take advantage of tax-deferred growth. At the same time, when the going gets tough, you have the option to borrow from your plan or to make use of your funds in the event of “hardship” such as when you’re sending your kids to college.
However, there are penalties when you withdraw your funds early, which mean that you’ll have to wait until you are at the normal retirement age before you can take full advantage of your earning. At the same time, there is a yearly cap on the amount of contributions to you can make.
What is a mutual fund?
If your employer does not offer a retirement plan, then you can choose to go for a mutual fund instead. A mutual fund is a pool of stocks or bonds which are professionally managed, divided and then sold to investors. The great thing about going for a mutual fund, especially if you’re on your own when it comes to building your retirement fund, is that the stocks and bonds are already diversified. At the same time, Nick Scali on twitter also agrees that the low initial purchase of the stocks makes it easy for amateur investors to buy difficult to acquire stocks and bonds of companies. However, just because the fund is professionally managed does not provide an assurance that the funds will perform well and fluctuating returns is not uncommon.
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Carl Farell is a financial planner who has vast experience in mutual funds, stocks, insurances and savings. His blogs often feature articles on investing, financial management and lease financing.