I. Steps to Retiring With a Significant Amount of Money
Early on in your career you will need to set goals for yourself and how you want to retire. Many people today skip planning, even though it is an essential step to a successful retirement. Planning can help determine the amount of risk you are taking, and whether it is too much or too little. You will want to be aggressive in a rising bull market, while being conservative in a falling bear market. If you want to earn more money, you are going to have to become more aggressive. If you want your investment returns to grow significantly over time, fixed-income investments are not necessarily the best option. Also with low return investments, inflation can eat away at their value over time. If you are willing to take the risk equities, will have greater returns. To minimize the risk of buying stocks, you will want to diversify your portfolio rather that putting all of your money into one company. You will want to invest in several companies incase if one company goes bankrupt, it will not wipe away all of your assets. You should also be prepared for a rainy day to hit at any time. Most likely set backs will occur and you should set up a back up fund to protect your self from a collapse in the market.
II. What is a 401(k) Plan?
A 401(k) plan is set up between an employee and the company that he/she works for. The plan gives the employee the option to be paid in cash or by setting a percentage of earnings to go into the retirement plan. The money that the employee puts into the account is not taxed until it is withdrawn. Another feature of some 401(k)’s (if your plan allows it) is that an employee can add money to the fund after it is taxed, and then the money can be withdrawn tax free. There also some employers who will match the money that an employee puts away up to a certain percentage. That is basically a free 100% return on investment. However, there are limits as to how much money you can put into a 401(k). For the year of 2010, the most amount of money an employee can add to the fund is $16,500. It is typical for 401(k) plans to be invested in mutual funds, but stocks, bonds, and other forms of investment may be included. Here are some conditions that allow 401(k) assets to be withdrawn: retirement, leaving the company, disability, when the plan ends, or when the employee reaches the age of 59 and ½ years of age.
III. Inflation Can Eat up Your Investments
Overtime, Inflation will decrease the value of your dollar. Ultimately, your purchasing power will be less. For example the price of one soda may cost $1 this year, and the same exact soda will cost $1.05 the next year due to inflation. The average annual rate of inflation is 3.1%. Again to put this into perspective, $1 million in 2009 will be worth $736,908 ten years later in 2019. Due to inflations ability to decrease the value of your retirement investment, it is an important factor to consider when making your retirement plan.