If you are planning for retirement, there is a good chance that you either have an Individual Retirement Account, better known as an IRA, or have toyed with the idea of starting one. If you intend to spend the golden years of your life enjoying yourself, opening an IRA is a great way to get there. Once you have your IRA, properly managing it is every bit as essential.
Starting out: Traditional or Roth IRA?
There are different, distinct advantages to opening and managing either a traditional or Roth IRA that may ultimately determine which is better for you. Writing for CNBC, Robert Cirrotti, Managing Director for Pershing, a BNY Mellon company, and Head of Retirement Solutions, notes that a Roth IRA offers the advantage of tax- and penalty-free earnings distribution upon retirement. While traditional IRAs earn tax deductions for contributions under certain conditions, taxes must be paid upon withdrawal of investments. If converting your traditional IRA to a Roth IRA seems appealing, Cirrotti notes that the removal of income limitations now makes it possible for anyone with a traditional IRA or other employer-sponsored retirement plans to make a Roth conversion. A Roth conversion makes the most sense if you do not anticipate needing funds for at least five years, expect to be in the same tax bracket or higher during retirement, are able to pay conversion taxes using another source of liquid cash or are able to see a scenario where you might transfer your retirement to an heir.
What is asset allocation?
According to Arielle O’Shea, investing writer for NerdWallet, Inc., asset allocation “is simply how your money is divided among different types of investments. Big picture, that means stocks, bonds and cash; little picture, it gets into specifics like large-cap stocks versus small-cap stocks, corporate bonds versus municipal bonds, and so on.”
O’Shea cites an example where 60 percent of $10,000 invested in an IRA is in stock funds and the other 40 percent is in bond funds, making for a 60/40 asset allocation. This would entail having a majority of your investments tied up in stocks, which provide greater reward over time but pose the most risk. Bonds and other fixed-income investments, on the other hand, are considered safer and provide balance.
As such, determining the asset allocation with which you are comfortable is ultimately a matter of personal discretion. Marc Davis, journalist with Investopedia, suggests routinely re-balancing your portfolio with market fluctuations in order to maintain your preferred allocation ratio.
When to start?
Davis writes that investing early is particularly advantageous if you do not have “burdensome financial obligations” such as children and a mortgage. Having fewer responsibilities will allow investors to be somewhat more cavalier when setting an asset allocation, making higher-risk, bigger-yield stocks more appealing.
Davis concocts a hypothetical example where investing $200 a month from the age of 25 on with an annual return of 7 percent would net a nest egg of $525,000 by the age of 65, while investing the same amount with the same annual return from 35 on would result in about $244,000 by 65.
Regardless of what questions, concerns and fears you may have, there is a financial professional who has heard them all. Do not feel as if you are ever forced to travel the path to retirement alone; seek the advice of the experts whenever and wherever possible.
