At age 30, setting up a retirement account may be routine, but it can seem only academic. At age 30, retirement is too far away. What is important is the next big thing, whatever it is. At age 60, the next big thing is getting to bed early and making sure your retirement program is in place. But should the investment strategy in these tax-deferred accounts be the same for a 30 year old and a 60 year old? The answer, of course, is ‘yes,’ – it’s both the same and different.
At 30, you pay penalties and taxes to the IRS for taking money out of the account; at 60, pay no penalties but you still pay tax at your regular tax rate.
On the investment side, there are several strategies to consider. Because the earnings grow tax deferred, some people have strategized that loading up the account with taxable interest-paying investments, like corporate bonds, is the best idea. This gives you steady interest, low risk and tax-advantaged interest payments. Remember that a long-term capital gain is taxed at a much lower rate than interest – so use the tax advantage in the retirement account, the thinking goes.
But should tax law control your investment strategy? Here is another way to look at it. Long- term averages for stocks have been close to double that of the intermediate term bonds. So a balanced account of half and half may provide a better return long-term.
OK, so you’re 30 years old and your strategy is long-term. What about the 60 year old? From 60 to 80 is a long-term 20 years. But a retiree’s earning power may be more limited than the younger person’s, so many times a more conservative approach is appropriate.
A key question: How does a retirement account fit with other assets and income? This is an important question to answer before completing an investment strategy.
For questions or more information on this topic call 934-0920.
Rick Glaze is the president of Glaze Capital Management of Los Altos and a registered representative of and offers securities through First Allied Securities Inc.
