Deciding Where Your Money Should Go
Once you have determined where you stand with your net worth, sorted out some issues of how, and maybe where, you want to live after you retire, and grasped the urgent need to save early and consistently, you will begin to face the more specific issues of exactly where to put your money. As you learned in the previous section, starting early has many advantages for the long term, but starting later offers choices, too. The truth of the matter is that you will review your investment strategies throughout your working life and beyond, making revisions as your need for greater income versus lower risk changes.
A truly successful financial strategy will have you putting your money in a variety of places. It makes no sense to place too large a chunk of your income where you cannot reach it without penalty if a need arises. You need to have saved money that you can access to cope with an emergency such as losing your job or discovering a leaky roof. Most experts agree you should always try to have enough cash on hand to cover a minimum of three months' living expenses. Or you may be saving for a particular expenditure, such as a home, a major appliance, a car, or your child's college education. This money should be set aside and its intended use clearly identified.
How long should I expect to be retired?
People are living longer and healthier lives. Some estimates say a man retiring at age fifty-five could live to be seventy-eight, or have twenty-three years of retirement. A fifty-five-year-old woman living to eighty-two could be retired for twenty-seven years. Bear in mind that the later years typically have greatly increased medical expenses.
Most retirement tax-advantaged investments are tied to your employment. There are a number of options depending on what your employer offers, if anything. If you are the employer of a small business, there are retirement vehicles tailored for you. There are investment vehicles that offer pretax savings, and others that invest after-tax dollars. These will be presented here, and in following chapters, with some of the pros and cons to weigh. There are plenty of places to collect information on the Web, in specialized publications, through government agencies, and from professional financial advisors. It is your money, so be wise and do your homework before jumping into any particular investment.
To lending institutions, it is entirely reasonable to take out loans for education, whereas it is unreasonable to take out loans to finance a retirement. The value of an education should increase the earning power of the student, which justifies borrowing. A retiree short on cash with no visible means of income cannot readily justify their application to a lender.
Among the investment choices you may have are:
Traditional individual retirement accounts (IRAs)
Roth IRA
401(k)
Roth 401(k)
Company pension plans
SEP plans
SIMPLE IRA
Opting for the type of investments available to you is just the first step. Depending on what you choose, you will then need to make decisions about specific places your dollars will be invested. They might be invested in stock of the company you work for, or in a mutual fund offered through your company's 401(k). The rest of this chapter will present basic descriptions and differences for IRAs.
