Plan for the Retirement You’ve Earned

Retirement plans are one of the most important strategies we’ll develop over the course of our lives. Done properly, it’s a key ingredient to enjoying your sunset years without financial worries. Done poorly, it may result in a significantly lower quality of life after your earning years.
When dealing with a decision this serious, it’s no surprise that people many turn to a variety of financial institutions to help and that’s where we come in. Aspen financial management offers a variety of services and free resources to help you retire comfortably.


Investing for Your Retirement: Types of Securities and Plans

Despite what many websites will tell you, there is no single recipe to successfully invest for retirement. Whether or not your retirement is comfortable depends on first identifying your individual retirement goals and time horizon, and then finding the proper balance of investments to accomplish your goals. These factors and your current financial situation will in large part determine whether you should focus on growth, income, or a combination of the two to sufficiently fulfill your financial needs.

Yet, we believe that as much as 70% of the potential return on your retirement investments depends not on the specific security you invest in, but rather on the types of securities you choose,called your asset allocation. Your portfolio’s asset allocation is the key to understanding your potential for gain and your specific risks. Additionally, how these investments are made can significantly impact their ability to fund your retirement. For example, if the same mutual fund can be bought through an annuity, 401(k), Roth IRA, or a standard brokerage account, then the difference between the accounts’ fees and taxes affects how much of the fund’s gains you get to keep.

The array of investment vehicles available can make investing for retirement bewildering for the inexperienced investor. As a firm serving more than 37,000 private clients, Aspen financial management has extensive experience in understanding how these numerous options can be assembled to support a wide range of goals. We are offering this guide to help investors understand the basics. We will take a look at a few of the main options for retirement investments, from different types of securities to tax-advantaged accounts.

Types of Retirement Investments: Securities

A security is any type of negotiable financial instrument, such as a bond, stock share, mutual fund or options contract. In fact, the word “security” has its origins in pre-digital days, when investors would receive a paper “security” certificate as proof of their investment. Though the technology that tracks them has evolved, securities remain the top vehicle people use to invest for their retirement.

Stocks - Stocks represent forms of ownership in a business. Of all asset classes, stocks have historically shown the best potential returns for investors over longer time horizons, but they are subject to high volatility in the short term. Some key things to keep in mind about stocks include:
  • Common stock has high growth potential, but may or may not generate income through dividends.
  • Preferred stock is more likely to generate dividend income, but will generally not grow in value to the same extent as common stock.
  • If purchased through an account that doesn’t receive special tax considerations, the length of time a stock is held before being sold can impact how the proceeds of its sale are taxed. Stocks held for over a year in “taxable” accounts generally enjoy a lower rate, while those held for a shorter time are taxed as regular income under current law.
Bonds -Bonds represent the debts an organization has taken on. They are, essentially, loans the investor makes to a company to be repaid at a specific time with a specific interest rate. Bonds have provided lower returns historically than stocks or similar equities, but they offer more reliable income with less short-term volatility. Key points for investors to remember with bonds include:
  • Bonds generally have a fixed term called maturity. At this date, the borrower generally repays the investor’s principal and no longer has to pay interest.
  • Bonds can increase or decrease in value when sold on open markets prior to maturity. For example, as interest rates move above or below the bond’s initial purchase rate, the value of the bond sold on the open market fluctuates.
  • As bonds mature, replacements at the same interest rate may not be available, so it is important to account for how these potential changes might affect your cash flow. This concept is called interest-rate risk.
Mutual Funds - These are among the most popular retirement securities, as they allow investors who might otherwise find it impractical to purchase a diversified portfolio to pool their funds together and share the benefits. Mutual funds can be a great option for investors who are new to investing for retirement, but their fee burden (paid to the fund’s manager and salespeople) can add up significantly for larger portfolios. Despite their popularity, mutual funds do have some potential downsides investors should consider as well:
  • Depending on the type of account through which the fund was purchased, tax events may be triggered even if you do nothing. Anytime securities in the fund are sold, the fund owners owe any net capital gains incurred. However, this impact can be mitigated through tax-advantaged accounts like IRAs or 401(k)s, where taxes aren’t levied until the funds are withdrawn.
  • While the main benefit of mutual funds is diversification, there is a danger of having investments overly concentrated in specific sectors or products. Different funds may take a similar strategy or have significant investment overlaps, so it’s important to look at the underlying securities within each fund to maintain a diversified portfolio overall.
  • Similarly, exposure to multiple funds can lead investors to work against themselves. For example, if one fund you own buys a stock while another you also own sells that same stock, your portfolio doesn’t actually change but you’ll get charged fees at both ends.
  • Funds are generally developed around a specific purpose or strategy, typically without investor feedback. As such, it’s important to regularly re-evaluate your mutual funds to consider whether they remain appropriate as your retirement plan evolves.
  • Mutual funds don’t trade in quite the same way as other securities, like stocks. Their values update at the end of each day based on the performance of the securities they own, minus any liabilities of the fund.
Exchange-Traded Funds (ETFs) - ETFs are similar products to mutual funds, but with some key differences. Like a mutual fund, they are pooled funds from multiple investors and managed by a professional money manager. However, while mutual funds can be bought and sold at a fixed price that updates daily, ETFs trade openly in the marketplace. This means ETF prices are more fluid than those of mutual funds. There are a few important considerations for investors considering ETFs:
  • As with mutual funds, it’s wise to be aware of the securities held in any ETFs you own to avoid concentrating your portfolio or paying for trades on both ends.
  • ETFs usually seek to mimic an index and are based on a “passive strategy,” with investors looking to hold onto the fund regardless of short-term market conditions(though ETFs taking active strategies do exist). As such, they generally have fewer trades and lower fees than traditional mutual funds. But, they can experience more volatility as their prices also move based on market perceptions, not the underlying portfolio’s value alone. Additionally, while they often try to mirror benchmarks, some funds may have large “tracking errors” relative to their actual index, so be sure to look at the specific fund’s performance history before selecting it.
  • Making the most of an ETF when investing for retirement requires discipline, as these funds usually attempt to mirror long-term benchmarks. Unfortunately, investors tends to become emotionally reactive to perceptions of market volatility and too often cash out without fully considering their investment time horizon.

Types of Retirement Investments: Real Estate

Investing in real estate can be a good way to generate income. However, investing in this sector can be more complicated than simply putting money into bricks and mortar. For example, real estate can encompass other investment vehicles such as stocks in apartment-management companies, bringing additional and more complex risks. With so many ways to invest in this area, it’s important to consider how much exposure you already have when considering new investments.

Of course, simpler real estate investments can provide good returns, such as cash flow from rentals and price appreciation that can be leveraged (think taking out a home equity loan). But there are many expenses to consider, including repairs, maintenance, property taxes, mortgage interest, management fees, legal fees, and more.

Alternatively, when investing for retirement, you could choose a Real Estate Investment Trust (REIT). Similar to mutual funds, REITs are companies owning or financing real estate through pooled funds to produce an income for the fund owners. REITs can provide investors with regular income streams and long-term capital appreciation. Because their prices often respond to shifts in the economy differently than stocks, REITs are often sold as a diversification tool. But, as we’ve mentioned, this may not be needed depending on how the rest of your portfolio is invested. Investors should check how their other investments expose them to changes in the real estate market when considering if this is the right tool for their diversification.

Ways to Invest: Retirement Savings Accounts

After gaining an understanding of the risks and rewards associated with various types of investments, it’s helpful to look at the potential benefits of some specialized accounts when investing for your retirement. While they come in numerous forms, the defining feature of these accounts is their particular tax advantages. The most common types encountered by typical investors include:

  • Traditional 401(k)s where contributions are deducted from your paycheck before tax is calculated, along with a matching percent from your employer. This both provides an instant return on your investment and lowers your current income tax burden. The money can continue to gain value tax-free until the time of withdrawal (usually after age 55, but potentially as early as 50 for Public Safety Officers), when it’s taxed as regular income.
  • Roth 401(k)s are essentially the same as traditional 401(k)s, except with the tax benefits reversed. You contribute funds after they have been taxed, but that money (and any gains it generates) isn’t subject to future income or capital gains tax. An important note: Employer matches must still go into a Traditional 401(k), as they haven’t been paid to you or taxed as income yet.
  • Traditional IRAs are essentially private accounts designed specifically for the purpose of investing for retirement. They offer the same tax-deferment benefits of a 401(k), but usually without any matching contributions (though some select varieties are employer-sponsored). There are also annual contribution limits that are far tighter than those for 401(k)s.
  • Roth IRAs. The Roth version of an IRA again switches the tax benefits, where tax is paid on contributions upfront to shield all future distributions. It’s important to note that limitations on IRA contributions count across all IRA accounts owned by a single individual, no matter whether they’re Roth, traditional, or another specialized variety (like SIMPLE or SEP). There are also additional limits on contributions into Roth-style accounts for those earning higher incomes.
  • Other Defined Contribution Plans can include 403(b) plans, 457 plans, profit-sharing plans, or employee stock ownership plans. Some of these operate similarly to 401(k)s while others have their own special rules on contributions and distributions. These 401(k)-like accounts include 403(b)s and 457s, which also come in Roth forms, while others may need to be rolled into one of these types of plans to enjoy the same tax advantages.
  • Defined Benefits Plans is the way to say “pensions” in legalese. There are a variety of structures to them, but the defining feature is that the beneficiary has been guaranteed a specific minimum monthly benefit. They can also include Cash Balance Plans with variable payouts, where a portion of the benefit is guaranteed while the rest comes from investments made by the employer.

No matter which type of account you use when investing for your retirement, remember that the power of compound interest means the single biggest way to maximize your returns is to invest big and to invest early and your aim should be to max out the accounts available to you as early as your situation allows.

Ways to Invest: Annuities

Annuities are often sold as retirement investment vehicles that can achieve market-like returns with little or no risk. Technically, annuities are types of insurance contracts in which the insurer invests on your behalf, meaning annuities function a bit differently than typical securities like stocks or bonds. They can be purchased through other retirement accounts like a security, but also are used to purchase securities. As you may have guessed, the nature of annuities is complex, so they should be considered with caution. In many situations, we believe investors could find more cost-effective means to gain comparable benefits while investing for their retirements.

The main value of annuities lies in the ability to shift the risk of outliving your assets onto the insurer. Annuity salespeople often highlight the tax advantages offered by annuities, as they allow funds to grow tax-free similar to the benefits offered by other retirement accounts. However, annuities (particularly variable and indexed varieties) often charge significantly higher fees than other investment plans. This often creates a strong headwind against your investments, which can limit the gains annuities can make.

Moreover, annuities often come with contracts thicker than some dictionaries. While the benefits promised for many annuities are often grand (e.g., “guaranteed return,” “protection from loss”), the terms and conditions that define them may not always be as expected or in the best interests of investors. Often the features appearing to be most attractive are optional “riders,” which serve to add to the annuity’s already considerable annual cost.

While it is possible, through careful selection of the interest terms and riders, to find annuities that are relatively low-risk, generally this comes with the trade-off of lower returns. Take so-called fixed-index annuities, which offer not only a minimum return (usually roughly the going inflation rate) but also the chance to enjoy a potentially higher one, when there is growth in an underlying stock index. You might assume this lets you have your cake and eat it, too—but the rate of return on the index relative to the annuity is rarely one-to-one. When the index is rising, you’ll enjoy only a certain percentage of the gains, often well below the index’s actual performance. And while the “floor” rate may provide some protection when the index is dropping, they tend to be only a few percent, which is often not enough to overcome factors like inflation that can reduce the purchasing power of your investments.

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