Investments you should be making and why

Here’s something to think about: Beginning the day we enter the workforce, we need to prepare for retirement. This means you should have a retirement account and make investments that will reduce your cost of living during retirement—investments like buying a house.

I want to share with you some information about these two important investments, and why they are necessary.

I know a woman who is just shy of retirement age. Recently, she took some time off from work to have a medical procedure performed. After she returned, we talked about work and life in general. Eventually, the conversation turned to her medical procedure and what the doctor had told her. Her doctor said she needed to retire—now would be best. We talked about it off and on for a few days. Finally, I asked the big question, “How much do you have in your retirement account?” She told me she has no retirement account. In fact she has no savings. She won’t be eligible for Social Security benefits for almost a year, so she cannot retire right now, and when the time comes that she can, Social Security will be her sole source of income. And do you know how much she’ll get??? Her monthly Social Security payment will be roughly equal to what she now makes in two weeks. (OUCH)

Unless someone (family? a good friend? her church?) steps in to help her, it’s likely this woman will be come homeless. You do know, don’t you, that not all homeless people are penniless. Many have some income, but not enough to afford a place to live. For them, it’s one homeless shelter after another (or worse) for the rest of their life.

What a pity. She’s worked all her adult life, and that is the prospect is what she has to look forward to. It’s not a pretty picture.
In the last twelve months, among the millions of people who have applied for and begun to receive Social Security benefits, the average payout is $1,404 per month.

There are a number of criteria used to determine what any individual’s benefit will be. (Note: It is a good idea to keep informed about what you can expect to receive. You can go to https://www.ssa.gov/myaccount/ and set up a My Social Security online account. There you can view records of your earnings, the contributions you’ve paid into the fund, and your estimated benefits.)

The important thing to consider is this: Can you live on $1,400-ish a month? Probably not…
I would never advise anyone to rely on their Social Security benefit as their main source of retirement income. Social Security needs to be viewed as a supplement to your retirement account.

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Investments you should be making and why

How to find a retirement account
A retirement account is the most important investment a person can make. If you think about it, it makes sense to build one: Most people want to want to retire and live the “good life.” What that means varies from person to person, but the need to prepare for it is common to all of us. If you don’t prepare for it, the means to your “good life” won’t be there when the time for it enjoying it arrives.

The term “retirement account” is self-explanatory. It’s where you put money you intend to retire on. It should be—at a minimum—an interest bearing account, but an account that produces income is what you’re really looking for. In most cases it involves long-term investments. There are a number of investment programs that can be used to generate funds for retirement, among them a savings account (but the return on your investment is very low). Then there are various investment plans. A true retirement account will defer your tax liability on both the funds invested and the funds generated by your investment until you begin to draw off the account. The 401k is that type of account. Many employers offer 401k retirement accounts to their employees.

Ask your employer if they have a 401k for employees.

Some companies match your deposits to your 401k. This means they will make deposits to your account according to company policy. The company I work for will match—dollar for dollar up to six percent of an employee’s pay—the contributions employees make to their (company offered) 401k accounts. This benefit is paid once a year.

The company contribution to each 401k is based on what the employee deposited over the previous 12 months. In order to get maximum benefit you must be in the employ of the company when it makes its contribution. If your employer matches funds, take full advantage of it. You are being given money.

If your employer doesn’t provide a retirement account, you can go to an online broker or visit an investment firm. Many people are comfortable doing business online. Personally, I prefer to talk face to face with a representative; I can ask questions and get answers quickly.

Whether you do business online or in person, you know that I always advise getting as much information as possible and verifying it before making decisions.

Some things to ask about are:
1) How much are the service fees?
2) What are the deposit requirements?
3) How has this fund performed in the past?
4) In the event of an emergency, can I withdraw money from my account?

Shop around for the right retirement program. I suggest you pick a name brand investment company—one with a good reputation. It’s also good to get an experienced representative.

Invest to reduce the cost of living during retirement

Saving money is an important aspect of preparing for retirement: We save so that we will have. We also need to take steps to insure that what we have will last. Housing is a vital component of the “good life.” For retirees, it’s likely to be the most expensive.

As of this writing (mid-2017), retirees—65 or older—spend about 35% of their income on housing. It could be less, or considerably more. The percentage varies by how financially prepared the retiree is.

Purchasing a house early in your career is a logical and =frugal= financial move for three reasons: You need a place to live now and in the future: If your house is paid off before you retire, your cost of living in retirement is reduced: If your house is paid off, it becomes a potential source of income rather than a liability.

1) You need a place to live now and after you retire. (That’s a no-brainer.) Since real estate usually appreciates in value, it tends to be a good investment. It is, however, important to look at the property and the neighborhood in which you’re going to invest. That includes getting a feel for urban growth and development. How will that affect the property in twenty years? Forty years?” And, though you do need a place to live, the place you buy doesn’t necessarily need to be where you live right now. Owning rental property is one of a number of ways real estate can be used to generate income. Keep in mind the object is to have housing, or accumulate the funds to acquire it, when you retire. (Note: Most of us will need the aid of real estate professionals in this endeavor.)

2) One reason to acquire a house early in your career is to have time to pay off the mortgage. When that’s done, you’ll have freed dedicated funds for other uses. You’ll have more money to recreate or save, and your cost of living will significantly decrease. As you go into retirement that last is very important. If you are renting, the obligation to pay for your housing continues.

3) I’ve already addressed the idea of using property to generate income as you prepare for retirement. Once you own your house, there is a financial tool called a “reverse mortgage.” When your house is paid off, someone can pay you the equity in your house—usually in monthly payments—while you continue to live in it. Eventually, the equity will be paid and they can claim the house, but that takes a number of years. Many retirees use a reverse mortgage to supplement their income. (Note: Since you will pass ownership of the property to someone else, it is important to consult an attorney or accountant before making the decision to take advantage of a reverse mortgage.)

I CAN’T AFFORD A HOUSE/ MY JOB REQUIRES ME TO MOVE TOO OFTEN

Home ownership may not be for you right now, but property ownership can be a lucrative way to generate funds to buy a home later. (See point 1 above.) And, there is validity in not being able to afford a house at this time. A statement I frequently hear is, “I could afford the mortgage. I just don’t have the money for the down payment.” In that case, now is the time to start saving. Heavily dedicate funds to the cause of having a down payment in the near future. You could get your house long before you retire. On the other hand, if you save a considerable amount of money, when you retire you could make a large down payment on a home and minimize your mortgage payment. Or, you may save to have the funds you need to make paying rent less arduous. Just because you can’t afford a house now or you move too often, doesn’t mean you can’t prepare for the future.

I don’t want to own a house

Some people don’t. Basically, homeownership is a relationship, and relationships require commitment. I’m not going into all the aspects of that, but I do know there are valid reasons not to commit. And, that’s ok. BUT… You need to do something to offset your cost of living in retirement, and housing is still likely to be you most expensive explicit cost, so take steps (saving and investing, or buying a house to live in or sell later) early in your career to minimize that expense. If you don’t plan to own a house, you’ll probably rent: Stay on top of the statistics that tell you what your money will buy. Guesstimate how much you’ll spend to continue renting, and start saving money today.

Conclusion

Early in your career, buying a house and instituting a retirement account are two major investments you should be making. And why? Housing is a retiree’s number one expense, and your Social Security benefit will not be enough money to live on. To have the “good life” in retirement, you need to prepare for it now.

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