Age 36: How to Invest for Retirement
Many people begin to save for retirement several years after joining the work force. Money invested at a young age has more time to grow than money invested later in life. People who begin to save for retirement at age 36 are already about one-third of the way to retirement. Many people in their 30s must balance the need to save for retirement with other expenses such as saving for kids to go to college. Most financial advisers like to meet with clients at least once a year to establish or review retirement plans.
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Time Frame
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People age 36 should begin the retirement planning process by deciding at what age they plan to retire. Traditionally, most people retire at age 65 although the federal government plan to raise the age at which people receive full Social Security benefits to 67 by 2017. The Internal Revenue Service allows people to access funds invested in retirement accounts at age 59 1/2. Withdrawals prior to that age incur a 10 percent tax penalty.
Types
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The IRS allows people to invest in two types of individual retirement accounts: traditional and Roth. As of 2010, investors can contribute $5,000 to either type of IRA. Traditional IRA contributions are pre-tax, whereas Roth IRAs contain funds already subjected to income tax.
Many companies allow employees to participate in 401k plans. As of 2010, employees can invest up to $16,500 in 401k plans. Most people cannot invest in 401k plans and traditional IRAs, although exceptions exist for some people, including military reservists, and low earners.
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Benefits
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Many companies make matching contributions to employees 401k accounts of up to 6 percent of their gross salary. Anyone who invests in a 401k plan with the matching contribution feature effectively doubles their money when making an investment. People should always start their retirement planning by fully participating in 401k plans.
401k and traditional IRA funds enjoy tax deferral, which allows invested funds to compound and grow at a much faster rate than taxable investments. Roth IRAs are not taxable unless withdrawn prior to age 59 1/2.
Considerations
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Having established an ideal retirement age, investors can quickly determine how much they must invest by multiplying their annual expenses, adjusted for inflation, over their anticipated retirement lifespan. Someone planning to retire at 65 should assume a life expectancy of 90 and calculate the lump sum needed at 65 to ensure funds last for their lifetime. Fixed interest investment products like certificates of deposits traditionally provide returns of 3 or 4 percent. Someone age 36 who invests in conservative instruments would not experience real investment growth because inflation would erode the small gains made by conservative products.
Potential
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Mutual funds containing mostly stocks offer higher potential returns than fixed investment products. No one can accurately predict future stock market performance, but over a 10-year average, historically many people have enjoyed returns of 10 percent or more by investing in stocks. To reduce the risk associated with market volatility, people should diversify their 401k and IRA accounts and invest in mutual funds containing both foreign and U.S. stocks. Diversifying across several sectors also provides people with protection through diversity.
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