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How Comfortable Are You With Investing Your Retirement Funds?

If you qualify for an individual retirement account (such as an IRA or RRSP) and believe it would be beneficial in your situation, one of the emotional hurdles to getting it set up is figuring out how comfortable with investing you are.

My own main IRA is with Zecco.com. My IRA there is a self-directed, which means that I choose when to buy and sell investments and what specifically to invest in. I’ve selected a huge variety of things, including ETFs and mutual funds, but am mostly investing in individual stocks now. I love using Zecco (especially now that they’ve improved their interface) but it took me a while to find a brokerage company that I liked and to get comfortable enough with investing to use a self-directed account.

There are many other companies that offer IRAs where you get to make your own choices about stocks and mutual funds. A few that I’ve tried are USAA, Sharebuilder, and Scottrade. Some companies allow you to invest in real estate as well.

If you’re a very hands-on person who loves doing research and are either experienced with investing or willing to become that way, a self-directed IRA might be right for you. You have to be comfortable making buy, sell, and hold decisions, and you must not be prone to panicking or getting greedy (since nothing protects you from yourself.) Self-directed IRAs are not for everyone. It suits my style perfectly though now.

If you’re comfortable with evaluating your tolerance for risk and understand the importance of asset allocation, but aren’t interested in individual stocks or managing investments from day to day, choosing a mix of funds from across the various types of asset classes might be more your style. You could choose good funds that align with your objectives and level or risk tolerance.

Using this method, you leave the choice of the individual stocks, bonds, etc. contained within the funds you’ve selected to the fund managers, and you just worry about the selection process and monitoring the overall progress instead. I do have a small IRA with Janus that is a single mutual fund, and I hold a few other mutual funds within my Zecco IRA as well. I selected all of those back when I didn’t feel as comfortable with evaluating individual investments. I suspect this is the most common way of handling IRAs. Many folks go through companies like Vanguard or Fidelity when using this method, but again there are many companies out there that you could use.

If your eyes glaze over when someone says things like beta, cost basis, or asset allocation, you may be more comfortable using a target date or life-cycle retirement fund, or with having a professional manage your retirement investments.

Target-date or life-cycle funds aren’t things that I have personal experience with, so I can’t say much about them. But the basic premise is that you pick the fund meant for the date you want to retire, and the fund manager(s) do all the work over the years. In theory the asset allocation is automatically adjusted as you get closer to retirement. It sounds like a sort of “set it and forget it” method of planning for retirement, but I don’t know how well it works. A quick Google search reveals a lot of criticism of these types of funds.

This leaves professionally managed IRAs. My husband uses this method, because he is not into investing, and I’m too chicken to mess with his retirement money. While I feel comfortable managing my own, I’d feel terrible if I made a suggestion and he followed but it turned out to be bad.

There are many different kinds of professionals who can take care of your IRA. Some are fee only (like the one my husband uses), and others get paid on commission (which means that they are probably interested in making sales.) If you go with a professional, I’d suggest picking someone with a fiduciary duty toward your money. That means that they must legally put your best interests first. Professionals with a fiduciary duty have to offer you investment choices that they believe would best meet your stated needs and goals, not just any investment that happens to align with your goals (but that may pay the best commission as opposed to being the best choice for you.)

Overall, it’s a matter of what will work best for you and what you are comfortable with. And there’s nothing that says you can’t change over time, if your needs or interests change. I’ve used every method (except for target and life-cycle funds) over the years and finally settled where I am now. Now matter which method makes you most comfortable, the important thing is to get started — and then monitor your investments and at least make sure that they aren’t doing worse than the market.

What has your experience been like in this area? Are you just getting started? Have you changed over the years, or did you find something that suited you right off the bat?

Posted in Investing, Retirement on 03.15.10 with 5 comments.

Would You Retire Two Years From Now If You Could?

If you could work reasonably hard for 2 more years and then retire with very little in retirement savings, would you?

I asked this question on my Facebook fan page recently and got some interesting responses. The responses seemed to vary depending on what the definition of retirement was for the person answering.

What would your answer be?

That question came up because I realized that if we do meet our goal of having our house paid off in two more years, then our expenses would be so low that we probably could technically retire at that time. (Or at least one of us could.) But…we’d have very little in retirement savings, so it would have to be a non-traditional retirement.

By “retire” I mean that we wouldn’t both have to work our full time jobs in order to pay our minimum monthly expenses. We could probably get by with a part time job, if it provided health insurance.

If we did “retire”, my intention would be to keep working on my business (because I love it) and to begin volunteering a good deal of hours each work. For me, retirement would mean the freedom to just work on the things I wanted to work on, when I wanted to work on them. (While traveling around and seeing random things, of course — which might require some creativity.)

So I suspect my answer to that question would be yes, IF we could get health insurance. What about you? How do you see retirement?

Posted in Retirement on 02.12.10 with 10 comments.

Demystifying IRAs

The basics of opening an IRA are simple in theory:

  1. Decide which type of IRA you want and qualify for (Traditional or Roth, if any)
  2. Choose a trustee
  3. Fill out some application forms
  4. Choose what you want to invest/save your money in
  5. Start sending money in — up to the applicable contribution limit or what works best in your situation.

In practice though, there’s a little more to it than that. In fact it’s common to be confused about just what an IRA is exactly.

Let’s start with what an IRA is NOT: An IRA is not stocks, mutual funds, index funds, real estate, money market funds, CDs, or cash. It’s not any sort of investment type at all.

And now for what an IRA IS: An IRA is a way of characterizing your retirement savings. IRA stands for Individual Retirement Arrangement, and Publication 590 from the IRS goes into great detail about the nitty gritty.

I like to think of an IRA as being like a big pot on the stove, with the investments I choose to put into my IRA as the ingredients in the pot that simmer over time.

You want to use a good pot — often a brokerage firm, investment firm, or bank — that has low or no maintenance fees (and low trading commissions, if you’ll be buying shares of stocks or mutual funds) and is reputable. Do your research to be sure you understand what you’ll be charged and what investment options are available.

You also want to choose good investments. These investment “ingredients” could be stocks, mutual funds, real estate, etc. (There are some restrictions on what your IRA can be invested in, and if you invest in real estate there are special considerations.)

If you qualify, an IRA can be an important part of funding retirement.

Posted in Retirement on 02.08.10 with 4 comments.

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