You need to invest money for retirement, but you’ve been putting it off because the terms make your head spin like a character in a horror film. You’ll feel less anxious once you know the lingo, so let’s take fear out of the equation.
For starters, the term investing means that you’re regularly setting aside money now so you can have more money later. I’m talking 10–30 years to leave that money alone! The more you save and the longer you save it, the better your retirement can be.
Types of Investments
Many people invest by purchasing stocks. These are little bitty pieces of a company, like owning bricks in a building. When the company prospers, your stock’s value goes up, which means you’ve earned money. When you invest, NEVER put all of your money in one stock. Single stocks are far too risky. Instead, put your money in several different kinds of stock. Most people use one of these options to invest in stocks:
- 401(k): This is a retirement savings account that a company can offer to its employees. The term 401(k) refers to the legal code that makes this possible. A 403(b) is the same type of thing, only for teachers, nurses and other people who work for nonprofits. Don’t get thrown off by the numbers. The money you invest comes out of your paycheck, so you’re not taxed. You pay taxes on the money you take out of a 401(k) when you retire.
- Individual Retirement Arrangement (IRA): This is an investment account that you open at a bank or a mutual fund company. You’re not taxed on the money you put into it, but you’ll pay taxes when you take out money at retirement.
- Roth IRA: This is the same as an IRA, with two exceptions. First, you put money into a Roth IRA after you pay taxes on it. Second, the money in a Roth IRA grows tax-free, which means you don’t have to pay taxes on it when you take it out at retirement. That means you don’t pay taxes on any money you make from it!
- Roth 401(k): This retirement savings account is offered by some employers. It’s different from a traditional 401(k) because it’s funded with money that’s already been taxed. The money you take out at retirement is not taxed.
Types of Funds
When you put your money in one of these retirement plans, you can choose a mutual fund to invest in. A mutual fund is a group of stocks from different companies bundled together into one larger fund. Think about it like bundling your Internet, cable and phone service into one package. Mutual funds work the same way, except they are a group of funds. There are several kinds of mutual funds:
- Growth and Income Fund: This fund bundles stocks from larger, more established companies. Its goal is to earn you money without too much risk. These funds are the most predictable and are less prone to wild highs or lows. Typically, though, they won’t earn as much money as other funds.
- Growth Fund: These are fairly stable funds made up of stocks from growing companies. These funds often earn more money than growth and income funds but less than aggressive growth funds.
- Aggressive Growth Fund: These stocks have the highest risk but also the highest possible financial reward for investors. It’s the wild child of funds. These stocks come from companies that have high growth potential, but they’re also less established and could swing widely in value.
- International Fund: These funds are made up of stocks from companies around the world and outside your home country.
All of those stocks are traded on the stock market. It’s the place for buying and selling stocks. There are two markets you’ll hear a lot about: The New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ). The NYSE is the place where stocks are traded face-to-face. With the NASDAQ, stocks are traded electronically.
The Most Important Term
One of the most important terms you’ll hear is financial advisor. These are the gurus of the investing world. They offer advice on the kinds of funds you invest in, when to change your investments, and even estate planning.
Why do you need one? Because they are the pros. They understand how the stock market works and can recommend how to invest. You can ask them questions about any aspect of investing you don’t understand. Make sure you find an advisor who has the heart of a teacher, though. Once you have chosen one, meet with them regularly, because your retirement is still your responsibility!
The only way to enjoy retirement is to plan for it and execute that plan with 100% commitment. You don’t need to be anxious about the terms anymore, so you don’t have any more excuses. You will retire someday, whether you’re ready or not. Start investing today so you can make your retirement dream a reality!