A Sure Thing? Not So Fast.
If you are ever approached with such an “opportunity,” the best advice is usually to run, not walk, as fast as you can in the opposite direction! Simply put, this isn’t how investing in the real world works—a fact that, unfortunately, some people have learned the hard way.
In the real world, there is an inverse relationship between risk and return. The higher the potential return an investment offers, the higher the risk that you could lose some or even all of your money. Conversely, the lower the potential return, the less risk there usually is of loss.
No Such Thing As a Sure Thing
Aside from unrealistic investment pitches like these, some individuals also mistakenly believe that other types of investments and income sources they are relying on for their retirement are going to be sure things. Some examples of these are corporate and government pension plans and retiree health plans and Social Security and Medicare.
In recent years, some large corporations have announced that they may not be able to fulfill future obligations they have made to their employees with regard to pension plans and retiree healthcare benefits. The federal government isn’t immune, either, as the U.S Postal Service recently missed a deadline to pay $5.5 billion to the federal government that would go toward payment of future retirement benefits for postal employees.
Meanwhile, the financial problems of Social Security and Medicare have been well-documented, and are one of the key issues at the heart of this year’s Presidential election. Many believe that without some type of reform, these entitlement programs that millions of retirees depend upon will not remain solvent for future generations.
Make It Happen
Stories like these reinforce the belief among many that the best way to help ensure a financially secure retirement is to make it happen yourself. This usually means starting a retirement savings and investing plan as early in life as possible and contributing as much money to the plan as you can throughout the course of your working life.
The good news is that there is a wide range of savings and investment plans available to help you save for your retirement. This is true whether you work for a private employer, the government or are self-employed. The most popular plans include:
• Traditional and Roth IRAs— Traditional IRAs offer tax-deferred growth and an immediate tax break for individuals who qualify in the form of a deduction equal to the amount of their annual contribution. And Roth IRAs offer tax-free growth, which can make a big difference over the life of the account, as well as tax-free distributions up withdrawal.
• Simplified Employee Pension plans (SEPs) and SIMPLE IRAs: These are designed primarily for employees of small businesses and self-employed individuals, and feature higher annual contribution limits than traditional and Roth IRAs.
• 401(k) plans:Employees make tax-deductible contributions that can be matched by their employers. In 2012, employees and employers can contribute up to $17,000 combined to employees’ 401(k) accounts, or $22,500 for employees age 50 or over.
• 403(b) and 457 plans: These are similar to 401(k) plans but are designed specifically for employees of educational and non-profit organizations. The annual contribution limits are the same as for 401(k) plans.
The one thing that all of these retirement plans have in common is that it’s up to you to get started by establishing the plan and contributing money on a consistent basis. The best path to a financially secure retirement is to make it happen yourself.
David Lerner Associates has created a guide to retirement plans that explains in more detail how these and other popular plans work. Download the guide for free.