Retirement and the Stock Market
Qualified retirement plans such as 401k's, 403b's and IRAs often use stock market securities as an investment option. The goal of using the stock market with retirement assets is increased growth without concern over annual capital gains issues. There are pros and cons to keeping retirement assets in the stock market as you get closer to actually retiring.
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Retirement Plan Benefit
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Whether you have an employer's sponsored 401k or 403b plan or have opened a self-directed plan, there are stock market investment options available to you. Most employer plans have several mutual fund options. Brokerage firms offer IRAs with stock and mutual funds investments; you might need to transfer assets from another IRA to a brokerage firm if you want stock market investments. When you contribute to a retirement plan, you reduce income and thus immediate tax issues. Money grows deferred. This means that you can see 100 percent growth in a year without worrying about income, dividend, interest or capital gains taxes. Stock market investments come with various levels of risk with no guarantees on returns.
Understanding Equities
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Because of the risk stock market investments have, it is important to find investments with a consistent history that meet your overall comfort level with fluctuations. Buy equities either through mutual funds or directly as individual stocks. Large cap stocks, like big brand-name companies, tend to have more consistent performance and smaller fluctuation ranges compared to small cap stocks or technology companies.
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What to Look For
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The stock market has thousands of options to choose from; finding the right investments can be daunting. Those new to investments should start with mutual funds to gain experience and comfort with market fluctuations. Seek mutual funds with a consistent history going at least 10 years back. Historical performance doesn't guarantee your results, but shows how the fund functions through good and bad economic periods. Funds charge annual expenses whether you increase your value or not; funds with fewer expenses are ideal. Turnover, the percentage of buying and selling stocks by the manager, is not pertinent to a retirement plan investor because there is no tax consequence. If the manager is consistently getting returns, the turnover is not a high concern.
Portfolio Adjustments
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The general rule is the longer you have before retirement, the more risk you can withstand within your retirement portfolio. Those under the age of 40 should be completely invested in stocks. By age 50, 20 percent of your retirement portfolio should transfer to fixed income investments such as bonds and bank certificates of deposit. Fixed income asset percentages should increase through age 65, where you should have 100 percent in fixed income investments with retirement income resources.
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