Wednesday, May 19, 2010

Basic Retirement Plan

Planning for retirement is one of the most critical projects you can undertake in your lifetime. Understanding so many terms can be overwhelming, but learning about retirement basics can build investing confidence in future retirees. Knowledge can put you on a course of financial stability. Here are different types of assets in which you can invest.

An annuity is an investment contract usually purchased from an insurance company that will provide the purchaser with future payments at regular intervals or a lump-sum payout. If the annuitant dies during the payout period, the remaining benefits are paid to the named beneficiary.
There are two types of annuities: fixed and variable. When an annuity is fixed, the insurance company invests the purchaser's principal in "Fixed Income" instruments (Bonds, Mortgages, etc.) and guarantees the principal and a minimum payout. If you have a variable annuity, the insurance company invests your principal in "Equities" (Common Stock) and neither principal nor payout is guaranteed.

Bonds are certificates of debt. This means that, when you buy bonds, you are lending money. The government or a corporation, which guarantees payment of the original investment plus interest by a specified future date, issues them. Thus, bonds are referred to as "Fixed Dollar Investments," because their yield is predetermined. There are many different types of bonds, including corporate, convertible and government bonds.
Corporate bonds are normally rated according to credit worthiness – AAA bonds are the most secure. The yields are primarily influenced by overall interest rates and the credit worthiness of the issuing company. In general, the higher the grade the lower the yield. Corporate bonds that can be converted into common stock are called convertible bonds. They offer a chance for capital appreciation if the price of the underlying common stock rises, and generally their current yield is higher than the dividend return on the common stock. The federal government, state, or municipality issuing the bonds guarantees them.
Another type of bond is the zero coupon bond. There are several kinds of this bond: treasury zeros, corporate zeros, or municipal zeros. They function as automatic compounding machines, don't pay any interest (zero) and are sold at a fraction of what their face value (full value) will be at maturity. Assuming the issuer does not default, they allow an investor to lock into a future return that is wholly predictable.

Mutual Funds:
A mutual fund pools the small investments of a number of people who have similar objectives. A full-time, professional investment manager then invests that money into a wide range of securities. Each person investing in a fund owns part of the portfolio. How much that is depends upon the total value of the securities in the portfolio. Investors receive a proportionate amount of all the earnings from the securities in the portfolio.
If an investor only has a few hundred or a few thousand dollars to invest, the investments cannot be so diversified. Mutual funds were developed to offer average investors a way to invest like the wealthy and offer small investors the same advantages that large investors receive: diversification, lower transaction costs (because the fund can buy securities in big blocks) and full-time professional management. The mutual fund concept has proved so successful that millionaires and huge corporations now invest in them as well, partly because it is much easier to let a fund handle all the bothersome details of buying, selling, record keeping, and holding the securities in a safe place.

A stock is a security representing a portion of ownership in a corporation. This means stockholders own direct ownership in a corporation. Performance of this investment depends on the success or failure of the company. Thus, stocks are called variable-dollar investments because there is no predetermined return and come in two forms: common and preferred.
Holders of common stock have the greatest control over the management of the company, but the last claim on its earnings and assets, which creates the risk. However, after the fixed claims of the bondholders and preferred stockholders have been met, common stockholders are entitled to share in all the company's further earnings, like dividends.
Preferred stock is non-voting, meaning the stockholder has no control over the management of the company. Preferred stockholders receive a fixed dividend that must be paid before the common stockholder is entitled to a dividend each year. It should be noted that "preferred" does not mean "better." Unless it is convertible, preferred stock has neither the growth potential of a common stock nor the relative stability of a bond.

Understanding the different types of assets you can invest in will prepare you with the knowledge needed to create a winning retirement plan. When you diversify your investments between multiple assets you can help ensure a successful retirement. Set up a meeting with a certified financial planner and get started.

1 comment:

  1. Those individuals that do not prepare for their retirement investments while working find it hard to survive without job. They tend to look for another work even if they are retired just to meet their needs.