Pension and Investment Advice
From Adviceopedia
If you are considering retiring, seek pension and investment advice to help you financially prepare.
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Pension and Investment Advice
Kinds of Pensions
Most pension plans available today are referred to as “defined contributions.” These kinds of pensions are individual accounts, like IRAs or 401(k)s, in which the value of the account and the pension depends on the success of how well the account is invested. The employer usually provides a range of investment options for accounts and the employee chooses how much money to allocate to each option.
Through roughly the 1970s, many employers provided “defined benefit” plans in which the employee received a specific amount of money, either a dollar amount or some formula based on salary, years of service, or other figures. Social Security is an example of this. Defined benefit plans have one significant advantage: They're insured by the Pension Benefit Guaranty Corporation, an independent branch of the US government. Employers pay insurance premiums and if the pension plan goes broke, the insurance company will fund its pensions, up to a specific limit.
Contributing to Investment Plans
Virtually all investment plans are funded by a combination of contributions by the employee and the employer. Some employers fund plans by a specific amount each year, usually a percentage of salary, while others only match the investment that the employee makes, up to a certain amount.
If your employer offers matching contributions, not taking advantage of this is like turning down free money! A matching plan can help you save twice as much money in the same amount of time.
Often employers put aside certain amounts but doesn't vest them, or give ownership of the money to the employee until a certain time period. This gives the employee an incentive to remain with the employer.
Investing Early and Often
Defined contribution plans depend on the success of the investment vehicles and the amount in the account. That's why compounding is so important. Compounding is simply the way that money your investment earns starts earning money itself. For example, if you invest $1,000 in an account that earns five percent interest, after a year, you have $1,050 earning five percent interest. See how it grows:
- $1000
- $1,102.50
- $1,157.63
- $1,215.51
- and so on
If you invest today, even if it's a little amount, compounding can really add up after 20 years.
Pension Investment Allocations
Most defined contribution plans offer employees a choice of different investment options. The options often include:
- An investment that primarily consists of stocks
- An investment that primarily consists of bonds
- An investment that is divided fairly equally between stocks and bonds
Stocks usually offer higher returns over time but can also lose value in the shorter term. Bonds, on the other hand, offer lower returns but are much more consistent.
Which investment you pick depends on how comfortable you are with risk. If you're not going to retire for in the near future, then your best pension and investment advice is to invest more in stocks than bonds. You have time to ride out any fluctuations. However, the closer you get to retirement, the more security you want in your investments, so consider investing less in stocks and more in bonds. Your source for stock market investment advice can help you in planning your investments.
Some pension and investment advice books or articles advise specific allocations, a certain percent of investment in stocks and a certain percent in bonds depending on how close or far you are to retirement. These are good starting places, but it's also important to consider your retirement goals, how much risk you're willing to live with, and how risky or safe your other retirement investments are.
Diversifying Pension Investments
One reason that so many people lost their retirement savings when Enron crashed was because the options available relied so heavily on Enron stock. That's a dramatic example but a very real one. Part of the problem was that in order to keep the Enron stock prices high, Enron management provided consistent pension and investment advice: Keep buying Enron stock.
This illustrates why it's so vital to remember to diversify. If your pension savings are in high risk investments, then you can hedge your bets by putting other retirement savings in lower-risk vehicles.
Sources for More Pension and Investment Advice
For more information on investing, consider consulting the following:
- AARP is an excellent source of pension and investment advice.
- Your employer is likely to have guides and other materials as well.
- The IRS has material related to pensions and taxes.
- Your bank should have a financial advisor on staff who can make recommendations.
