You can no longer follow the age-old traditional advice of putting all your assets into bonds, CDs and cash, which are more conservative. You have to keep investing actively and you have to diversify, or you’ll be forced to work beyond retirement. You must take retirement planning seriously and build some wealth while you are still young.
If you start early and are consistent about contributing, you can develop a tremendous amount of wealth. Young people in particular have the opportunity to invest in things that simply didn’t exist years ago. If someone in their twenties puts just $5000 per year into an IRA for seven consecutive years, and achieves an 8% growth until they retire at age 65, they will have over $1.2 million dollars.
Of course, larger contributions, continuing contributions, or a higher rate of return would yield even more money. Getting started early optimizes the full benefit of tax deferred compound growth.
Don’t limit yourself to 401Ks and other instruments that give you limited investment choices. Consider moving into more self-directed investments. Self-directed investing allows for opportunities like private equity, real estate, foreign investments, foreign stock, and a variety of other investments. Of course, self-directed IRA accounts are an excellent way to do that.
If you are young and make less than $100,000 per year, get started with a Roth Ira. Effective January 1, 2010 there is an opportunity to convert a traditional IRA to a ROTH IRA with tax free growth for life, regardless of income. You can even split up the tax impact over a two year period. You can make non-deductible contributions in the next 2 years into IRAS, and then convert to a ROTH, and you won’t be paying tax on the non-deductible contribution amounts. You’ll only have to pay tax on the growth of those amounts over the first two years. Additionally, the first $10-12,000 will go into your ROTH tax-free. Assuming 3 % earnings, overtime a ROTH IRA will pay off during your lifetime and will have additional benefits to your beneficiaries. You’ll never pay tax on those earnings.
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