How to Accumulate Money on Which to Retire
Once you’ve set your income goal (e.g., 60 to 80% of pre-retirement income) and determined how much Social Security you’ll receive, then you can see what else you need to accumulate. Before you decide where to put your retirement dollars, you need to know how and when you’re going to save them.

Pay Yourself First
One way to invest for retirement is not to budget for it. If you try to budget a portion of your salary for retirement savings, this item will always be at the bottom of the list. Why? All other expenditures will either have a more immediate, short-term benefit or may seem to be more urgent. It’s just human nature.

There are two ways to approach saving:
1. Pay yourself first. Make sure money for retirement investing comes off the top, not the bottom, of your income. With one caveat: if you’re paying high interest on credit card debt and getting no income tax deduction, it may be best to clear up your debt situation first.
2. Make the saving process automatic so you don’t even have to think about it. How? Try setting up automatic withdrawals from your paycheck or your checking account that go directly into a retirement plan, IRA or other personal savings and investments.

And, with some retirement contributions, you can get the added benefit of having the contributions reduce your taxable income for that year. You may not even miss the money you’re putting away - you may pay less income tax that year.

Choosing the Right Investments
Answering these eight questions will help you find the right investments:
1. How much risk is associated with your portfolio?
2. How are your investments spread out and diversified?
3. When will you need to turn an investment into cash?
4. How easy will it be to turn your investments into cash?
5. What are the income tax consequences of your different investment options?
6. What costs are associated with each investment?
7. How do your investments defend you against future inflation?
8. Do you understand what you’re investing in?
Every investment has its pros and cons. So what are the right investments for you?

Investing for Growth
Naturally you want your investments to grow in value. The earlier you start investing, the more time you have for that growth to happen. The later you start to invest, the more pressure you’ll feel to look for fast growth.

But be careful. When you’re eager to catch up, it’s easier to ignore the warning signs of an investment that’s too risky. A high rate of return usually involves greater risk. The best ways to minimize risk is to start investing as soon as possible and consider securities with low levels of risk.

Also, you may be able to take more risks when you’re younger because you may still have time to bounce back from investment setbacks. But in general, a high level of risk isn’t healthy for anyone.

If you’re looking for growth over time, stocks and mutual funds that own stocks have generally performed better than bonds and bond funds. However, there will always be periods of volatility. Instead of trying to ‘time the market,’ the more years you can invest, the more likely you are to reach your goals without the need for unusually high returns. That way, you’ll come out closer to the historical average (about 11%), through good times and bad.

Investing for Income
Once you’ve accumulated your retirement nest egg, you may want to switch from growth to income-producing investments. Bonds, money market instruments, some types of savings accounts or certificates of deposit can produce more income or bring you a regular source of income. Stock dividends can be a source, too.

However, with increased life expectancies, and the impact of inflation over time, you may still need to invest for some growth, too, during your retirement years.

Investing in Retirement Plans
Tax-deferred retirement plans and accounts allow your investments to grow faster. A tax-deferred investment is one that isn’t subject to income tax until you take distributions. And with a Roth IRA you may pay no income tax on distributions at all.

Why does a tax-deferred investment grow faster than a non-deferred one? It’s no mystery. If the IRS suddenly announced that you didn’t have to pay income tax, your take-home paycheck would go up, and you’d have more money to spend and save. That’s how it works with tax-deferred retirement plans and accounts. You are not subject to income tax until you take money out until you take a distribution.

By contrast, if you pay income tax on your non-tax-deferred investments during the growing years, there’s less money to grow.

If you are an employee, you may participate in a plan (such as a 401(k) plan) where your employer makes contributions to partially or fully match your contributions. This gives you a strong incentive for adding retirement dollars to the plan. Your employer’s money can clearly help you reach your retirement goals.

Even if you wanted to put every dollar you had into retirement plans and accounts, you couldn’t. There are legal limits on the annual contributions you can make. The limits vary considerably.

Remember that you’re investing in retirement plans and accounts for the long term. Some plans may allow participants to take loans on the money in their account, but these are retirement plans, not ATMs. Taking money out of your retirement plan now can seriously reduce the size of your retirement nest egg: you won’t have all those assets working for you.

And another thing: If you take withdrawals before age 59½, you may have to pay penalties.

Also, distributions from retirement plans and accounts are generally subject to income tax at ordinary income tax rates. Sometimes Roth IRA proceeds are income tax-free. There are two main classes of income tax: ordinary and long-term capital gains. Ordinary income tax rates are higher (the federal rates are from 15% to 39.6%). Long-term capital gains rates range from 8% to 20%.

Investing Outside Retirement Plans
Personal investments are generally invested in stocks, bonds, mutual funds, and savings accounts just like retirement plans and accounts. But your personal assets may include a wide variety of other things, like business interests, real estate, precious metals, and annuities-even life insurance.

All these choices come with greater complexity. Yearly income from these investments may be subject to ordinary income tax. If you sell them, you may be taxed at the ordinary income tax rate or the long-term capital gains rate, depending on the asset and how long you’ve owned it.

Any income, such as dividends or interest (except for interest from some bonds), is taxed each year. And your income tax on any profit from selling these investments could be at the lower long-term capital gains rate.

Finding the right investments and managing them isn’t easy. Depending on your income, professional advice is often well worth the cost. Just be sure that your financial advisor isn’t more interested in making a commission by selling you a particular series of mutual funds than on growing your money.

Remember: Objective advice from an experienced and independent investment advisory service or advisor puts your needs first.

Monitoring Investments
Your investments won’t take care of themselves. You need to put some effort into staying on top of them, making sure you’re still on the path to meeting your retirement needs.

Keep this in mind: Investing to meet your retirement needs is a lifetime pursuit.

Start as soon as possible. Research your investments and educate yourself. Pay attention to the costs as well as the performance of your investments. In a surprisingly short time, you’ll reap significant rewards like peace of mind and a secure retirement.

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Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.

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