We have now covered getting ready to invest as well as some investment options for the short and medium term. Now we will talk about retirement and end of life savings. The final investment type is the IRA, or individual retirement account. There are two different types of IRA. The traditional IRA is a tax-deferred retirement account. What that means is that taxes are not due until funds are disbursed from the account, hopefully during retirement. This can be a way to save for retirement while lowering your tax burden in the present. A Roth IRA is an account for which you pay taxes up front, but then you never pay taxes on any future earnings. Given the fact that, especially earlier on in your career, you are more likely to be in a lower tax bracket, up front taxes can translate to serious savings down the road. There are also fewer restrictions on when you can tap into a Roth IRA. In fact, Robert Powell suggests that a Roth IRA can serve dual purposes. It can serve as an emergency fund, since money can be withdrawn at any time for any reason, tax and penalty free, as long as the IRA is kept as cash, and once the investor has another emergency fund built up elsewhere, the Roth IRA can be invested more aggressively to work towards retirement (Powell).
Okay, we've covered a number of different investment options, now let’s take a moment to discuss upkeep. Most of the investment vehicles we have seen are relatively low-maintenance. That does not mean, however, that it is a good idea to invest and forget. While it is not necessary, or even helpful to keep a close eye on each and every individual stock or bond that is owned by your fund, you should always make sure that your allocations are suited to your goals. Allocation is basically the way you set which risk levels you are comfortable with within a fund. For instance, Richard Lawch, former senior vice president at Fannie Mae, suggests that, as a younger investor, you may want to invest 70-90 percent of your total portfolio in stocks and only 10-30 percent in bonds and cash, but as you get closer to retirement, you should adjust your allocation to more bonds/cash and back off a bit on the stocks (Lawch). These percentages won’t just stay where you set them naturally. As assets gain and lose value, your allocation percentages will get out of whack. Therefore, according to Kiplinger’s Personal Finance, it is advisable to spend about an hour each year re-balancing by selling off assets that are higher than your intended allocation and using that money to buy more of assets that have dropped below (“Smart Investing”). Mr. Lawch makes the very same point in admitting that though it may sound counter-intuitive, what you are essentially doing with this rebalancing process is just what you should be doing: buying low and selling high (Lawch).