The shear mention of retirement can bring mental images of strolling on a beach, basking in the warmth of the sun without a care in the world. Maybe your heart’s desires involve travel or spending time with family & friends. Few people though imagine working at age 70, realizing that the retirement that you dreamed of 30 years ago may never come. That’s the scenario more likely to become a reality for 1/2 the population of the U.S. and could include you unless you get started.
Step 1 – Don’t Become Overwhelmed
If what you know about planning for retirement can fit on a pencil tip, don’t get discouraged or overwhelmed. There are some very basic terms & products you should understand to gain control over your retirement prosperity.
Start with finding a professional you can communicate well with. After all, you will need to rely heavily on this individual’s advice, especially in the beginning. The goal here is to get a proper assessment of your present circumstances and a picture of what you want your retirement to look like. This will help to develop the strategies you’ll need to reach the golden years successfully.
Retirement savings can take many forms. In other words, there are many roads that lead to retirement and choosing the right combination will get you there sooner and safer. For most, the word investing means using stocks, bonds and mutual funds to grow wealth in a 401(k) or IRA. Others use real estate by selling properties for income or having a collection of rental homes and commercial properties that generate lease payments. For today I’ll write about the most common methods, the stock market and mutual funds. In follow up blogs we’ll talk turkey about real estate.
The ABCs and 123s
One of the first questions I usually get is, “What is a mutual fund?”
In its most simple form a mutual fund is a combination of stocks that someone known as a fund manager puts together. The idea of a mutual fund is you put money into one account to invest in many different stocks. If you have ever heard the advice, “Don’t put all your eggs in one basket” the mutual fund attempts to help you to follow that guidance. Mutual funds start by declaring the objectives for the investments. For example, a mutual fund in the retail sector may be made of stocks from Sears, Wal-Mart, Target, Macy’s, Best Buy and Lowes. The value of that mutual fund will depend on how these stocks preform collectively. The idea is, if one stock tanks, the combination of the other stocks will help offset your losses. One slant on this same process involves investing without a fund manager and instead using an index.
Index funds are meant to allow diversity and simplicity under one roof. An index is the measurement of a combination of stocks. The Dow Jones Industrial Average (DJIA) is an index of 30 different stocks that are supposed to be a representative of the the entire stock market. The S&P 500 is another index of 500 different stocks again measuring the overall performance of the market as a whole or a bellwether for the U.S. stock market.
The advantages of investing in index mutual funds are they’re easy to track, they are less expensive overall due to lower management fees (the fund managers don’t actively manage the funds so the fees are typically less) and historically the indexes have produced reasonable returns over time.
Don’t Put it Off
These are some VERY basics of the retirement planning process. The primary focus should be “Do not delay” when beginning to plan for retirement until you understand it all. Each year you wait to begin saving for retirement is a year you lose in money accumulated and money that could have grown. One of the best analogies I’ve heard in my career as a financial planner was in a CFP class I took 15 years ago. Retirement savings is kind of like a road trip. You can either use a sports car to get there really fast, or you can start with a sedan and take a little more time to get to your destination. You can always change the type of car during your travels, but the key is to get in the car and start driving or your never going to get there.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.