- Francesca Sacco
4 Common Retirement Investments and the Differences Between Them
You’ve heard many times about the importance of saving for retirement. But when it comes to actually taking steps toward retirement planning, you’ll need to find a place to put your money and let it grow over time.
In other words, retirement saving should actually be investing — not just putting away money, but taking those contributions and generating additional value that will increase your expendable income in retirement.
Whether you’re employed or self-employed, and regardless of what stage you’re at in life, different retirement vehicles may offer different advantages and opportunities to meet your long-term financial goals. With many different retirement investment options to choose from, it’s helpful to familiarize yourself with the most popular options. Here are four common retirement investment options you may want to consider.
1. IRAs (Traditional and Roth)
Individual retirement accounts (IRAs) are the most common type of retirement investment option in large part because of the tax benefits these funds can offer.
These tax benefits, along with relevant eligibility and contribution limits, are unique to each type of IRA. There are two main types of IRAs:
- Traditional IRA: This is a tax-deferred retirement investment account that allows investors to deduct contributions from their taxable income. Instead, taxes are paid on that money when you withdraw money from the account.
- Roth IRA: The main difference between Roth and traditional IRAs is that Roth contributions are not tax-deductible. However, the earnings from these contributions can be withdrawn fully tax-free once you are eligible to withdraw funds. This can offer significant tax savings once you are in retirement.
If you’re over 50 years of age, each of these IRAs offers catch-up contributions of an additional $1,000 above the annual contribution limit.
2. Mutual Funds
Mutual funds are pooled funds collected from a small group of investors. These funds are professionally managed and can spread investments across stocks, bonds and other assets.
There are several popular types of mutual funds, all with different investment focuses and goals. These can include equity, index, balanced and international/global funds among others. The performance of these mutual funds is affected by the mutual fund manager, and as with any investment fund, they involve a certain degree of risk that can be affected by your mix of investments.
Although stocks are an investment option available through IRAs and other types of investment accounts, you may also choose to keep some of your invested funds in a joint investment account.
While joint investment accounts for stocks don’t offer any tax benefits, they allow you to invest in the stock market while also being able to access those funds for any reason and at any time. You can also choose between having those investments managed through an adviser, buying and selling stocks on your own or a combination of these strategies.
As with any investment, remember that while stocks offer the benefit of liquidity in a time of need, market declines could result in you selling stocks at a net loss if you don’t have cash savings to cover unexpected costs.
Bonds are investments made into debt securities that have been issued by governments or corporations. Bonds can vary in length and the rate of interest earned, although this earnings potential is typically lower than what other investment types may offer.
Although the earnings potential from bonds is less than what stocks and other investments offer, they are also far less risky and are a popular way to preserve wealth while still generating earnings near or during retirement.
In the end, your retirement investment strategy may involve more than one of these retirement vehicles, and your preference for different investment options may change over time as your saving and investing goals are adjusted.
Regardless of what those goals may be, your local credit union offers a number of financial planning tools and resources to maximize the long-term value of your retirement investment efforts. Not a member? Join 7 17 Credit Union by opening a checking account.