RETIREMENT PLANS
For those of you who are still in the
workforce, it may also be advantageous to explore any company-sponsored
retirement plans, such as 401 (k) and 403(b) programs. There are some new
ones for small businesses, for example the K-1s or SIMPLEs which are
especially attractive. These are inexpensive to put in place and maintain.
The last tax-advantaged investment this report covers is the Individual
Retirement Account (IRA).
IRA's
There are two types of IRA's.
They are the Traditional and the Roth IRA. Both type's of IRAs offer three significant advantages
to investors planning for retirement.
The first is
tax-deferred income. We have already seen that tax deferral increases your
chances for higher income during retirement. With the Roth IRA, it is actually,
tax free income.
The second benefit
is affordability. Whether your IRA contribution is tax deductible or not,
you can contribute as little as $25 a month in most mutual funds. You can
invest up to the maximum of $5,000 each year if you are under age 50 and $6,000
if you are over 50. The money your Traditional IRA earns is not subject to taxes
until withdrawn.
The third is
flexibility. You have the freedom to decide how your want to invest –
stocks, bonds, mutual funds, exchange traded funds, certificates of deposits, or
silver and gold coins.
The Roth IRA does not offer you an
opportunity for a tax deduction when you put money into it. However,
unlike the traditional IRA it's income in retirement is tax free.
When an investor has five or more years before they retire,
an IRA can be used in conjunction with equity stocks/mutual funds, which have
the potential for powerful growth through the compounding of the money
invested. Equities have traditionally returned the best long term results even
considering the relatively higher risks associated with them.
However, if you have ten or more years to retirement you
can virtually “zero out” the risks by investing in one of the several mutual
funds which guarantee the return of full amount invested on the maturity date,
(plus earnings/capital appreciation) to investors who reinvest all dividends
and hold their shares to the maturity date.
Consider the example of one such fund, Kemper’s “retirement
fund Series I”. * If you had invested $2,000 in this fund on February 5, 1990, by
the end of 1993, the initial investment would be worth $3,477. That’s an average
annual return of 15.21%. The following graph gives you a more detailed picture
of how this fund performed on a monthly basis.
*This Kemper Fund no longer
exists. Because of consolidation in the investment companies, Kemper's
funds changed to Scudder Funds, then DWS Scudder Funds, and presently it is
Deutsche Investment Management. However, we use this for instructive
purposes since it shows an actual track record for such a fund.
Also, we used the years 1990 to 1993 because, I believe it more illustrative of a
"norm" than the later 1990's or the financial crisis of 2008.
Tax-Free Municipal
Bonds/Mutual Funds
Life Insurance and
Annuity Products
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