Are you planning your retirement? Will you be retiring in the next 20 to 30 years? If you are indeed planning your retirement and it will be in the 20 to 30 year time frame there are some things you need to consider as you invest and plan for your future retirement. We will touch on a few areas that a young worker would need to consider and then a few tips on how to maximize your tax advantaged retirement accounts.
As painful as it is to say this but younger workers may need to consider the fact that Social Security may not be an option in your retirement. Also, in the event it is still operational it replaces on about 25% of your income in a best case scenario. Consider the fact that for many years the fund operated with a surplus of money; however, the government did not leave the excess money in the Social Security fund but rather spent it to help balance the US budget. And now because of this poor stewardship in utilizing the excess funding Congress will be placed in the position that it may have to actually reduce benefits or even phase out the program. Currently Social Security funding is not in that bad of shape, or at least not as bad as people tend to make you believe. The main drawback to keeping the benefit around is the Medicare portion of Social Security that provides healthcare to retired seniors. These are the costs that are really hurting the entire Social Security program. Overall, between Social Security and Medicare benefits they are the single biggest source of expenditures the federal government incurs.
A second area that young and middle aged investors needs to consider is investing outside of the US. While most large corporations in the US have large overseas positions to consider they are not in fact foreign investments. They are in fact domestic companies that may or may not have a large portion of their profits generated outside the US. A true foreign investment is one that is not necessarily regulated by the Securities and Exchange Commission. Where domestic companies may pay a dividend on a set quarterly basis and that dividend is usually based on the prior quarter’s dividend. Foreign companies will generally pay a dividend one or twice a year and they are based on profits and not prior payments. Then like their domestic equals who earn money in foreign currencies, true foreign companies will need to be converted to the US dollar making them seem more volatile than a domestic company. However, both will experience a currency risk to some degree. Now foreign markets are a better value than the US markets due to a host of reasons. One as the Federal Reserve continues to cut back on its bond buying smaller foreign markets and some foreign markets in general are finding it harder to find funding for their continued operations and growth. Also, local and regional politics in foreign countries tend to make investing in them more volatile and to a large degree it does. But with a little research and planning there are some excellent investing opportunities abroad.
And finally while it currently does not pay to have a large cash position it does make sense in the fact you need readily available cash at your disposal if you are to take advantage market opportunities. If an investment you really like takes a hit and declines in price without a cash reserve you will not be able to take advantage of the opportunity without the liquidation of another position. And that liquidation could have tax consequences or you may be placed in a position where you are having to choose between the new opportunity or keeping another existing position. There is a reason why Berkshire Hathaway under the direction of Warren Buffett keeps large amounts of cash and cash equivalents on hand and that is to take advantage of market conditions that are favorable when investing.
Now if you are planning for your retirement as you should be there are some things to consider with your retirement accounts and are like some additional guidelines. If you want to own a limited partnership or a REIT it is best to own these in a retirement account. First they are corporations that do not pay taxes provided they pay at least 90% of their profits out as dividends to shareholders. While these are considered dividends they are not taxed like dividends but rather as ordinary income. But before you but one of these investments it is best to understand the company and what it does. You also need to make sure you understand the balance sheet and income statement so you can be sure they will be able to continue the payments without issuing extra equities or taking on debt.
Also it is never a good idea to put a mutual bond in a tax advantaged account as they are state and income tax free provided the bond was issued in the state you live. If the bond is issued from another state there are state taxes but not federal. These tax breaks are built into the interest rate a bond will pay and thereby municipal bonds as a rule pay a lower interest rate than a corporate bond. And speaking of corporate bonds, with interest rates so low they are paying similar returns as municipal bonds. But owning a corporate bond in a tax advantaged account makes since as the interest earned on these bonds is like that of the dividends mentioned in the earlier part of this paragraph and they are taxed as ordinary income. But there are still some incredible investing opportunities for high quality smaller companies that are issuing bonds who pay higher interest rates due to their size and not by their ability to repay the bonds. With some research and digging you can find these hidden gems and use them in your portfolio.
And finally it is a good idea to have some exposure to precious metals. Now this can be through ETFs or funds that invest in the metals by owning then in physical form such as SPDR Gold or iShares Silver. Right now the cost of gold and silver is at or below the production costs making it a good opportunity for investments. Also if you wanted to own the actual gold or silver bullion it makes sense to be buying these assets now while the price is advantageous as selling them outside of a tax advantaged account results in a 28% tax on precious metals and collectables. If you want to own the actual metal yourself you can put it in a qualified IRA provided it is done through a company acting as the trustee for your IRA. But shop around when looking for such companies and always make sure that they are endorsed or approved by the Better Business Bureau.