Retirement Planning: 3 Time Frames

It is important to plan for your retirement. You should not rely on social security to cover your expenses. It might not be enough to maintain the lifestyle you are accustomed to. That's why it helps to be proactive and handle your investments so that you won't have to flounder about when the time comes.

This article is divided into three time frames. Financial advice about retirement is going to differ dramatically depending upon how long it is until you are planning on retiring. The same investing scheme that young people follow might be dangerous for those nearing retirement.

Many Years To Retirement

If you have several decades before you retire, then you should be aggressive with your investments. There has been much debate as to the danger of Social Security money running out. Regardless on where you stand on the issue, you should put aside money from your paycheck and invest it.

If you work for a company that operates a 401k with matching donations, then this is definitely something you should take advantage of. If you are self employed, then you should open an IRA.

Your investments should be in the stock market. However, you shouldn't try and play the market like a speculator. The best and safest way is to invest in a broad-based index fund. These funds invest in a multitude of stocks. That way the failure of a single company won't crush your portfolio.

Retiring In A Few Years

If you are retiring in a few years, you should move your money into bonds. The stock market is volatile. In the long run, you can look to ride out low points, but the closer you are to needing the money, the less risk you should tolerate. Bonds are much safer than stocks. You should choose government-issued bonds and avoid cooperate bonds. Much like the investing advice for younger people, you should invest in a fund. This fund will contain bonds from many different issuers. That way you're not in trouble should a particular bond issuer default on their payment.

Retirement's Here

Now that it's time to retire, you will want income. You could continue to hold your bond portfolio, or you might choose to purchase an annuity. An annuity is a financial instrument that many retirees like because it locks in a guaranteed payment. The bond market might dip, which would deprecate your savings. An annuity, on the other hand, is safe from swings.

What happens is that you purchase an annuity from an insurance company. They then determine your life expectancy and allot a specific payment each month, depending upon the amount of money you put into the annuity. The great thing about an annuity is that you can never run out of money. The company will pay you every month for the rest of your life, even if your payments exceed your initial financial contribution.