Before the 401k, there was the IRA. The simple investment account that anyone who had earned income could use to save for retirement. For many years contributions to IRAs were held at a paltry $2000, but about a decade ago they were raised to $5500 per year . Put away $5500 for both yourself and your spouse into IRAs each year and you really start saving up a serious amount for retirement.
One good thing about IRAs is that they let you invest in virtually anything. One issue, however, is that they let you invest in virtually anything. For many people who really don’t understand investing this can be a serious issue. They just don’t know how to invest the money, so they do something foolish like:
1) Leave it in a money market fund so they lose money to inflation each year.
2) Invest in a set of high cost mutual funds recommended by their broker.
3) Put it all into a single stock, leaving open the chance that they can lose it all.
4) Trade in and out of different stocks, racking up a lot of commissions for their brokers but making little money themselves.
For those who don’t want to fool around much with investing, here is a really simple strategy for investing in your IRA:
- If you are younger than 45, put half of your money into a large cap index fund such as an S&P500 ETF and half of your money into a small cap index fund such as the Vanguard Small Cap ETF.
- If you are between 45 and 55, shift 30% of your money into a bond/income fund, the leave 35% of your money in the large cap fund and 35% in the small cap fund.
- If you are between 55 and 60, put 50% of your money in a bond/income fund and split the other 50% between a large cap and a small cap ETF.
- Assuming you’re retiring at age 65, between age 60 and 65 start to sell off some of your assets to raise cash. Figure out how much cash you’ll need from your IRA each year in retirement and raise that much cash each year, placing it in a CD set to mature just before you’ll need the money. If you’ll have another source of income and won’t need to tap into your IRA just yet, just stay fully invested in the half bond/half stock portfolio.
So there you have it – real simple but really effective. This strategy keeps your fees low, gives you plenty of diversification, has you take more risk when you’re young and can afford to wait for the market to recover, and starts to get more conservative when you start to near retirement. The only trick now is to stick to it and not let your emotions get the best of you. The worst thing you can do is let your emotions drive you into making a mistake.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.