Most people have a safe and reliable option to save for their retirement, which is the retirement plan their employer offers. Once the employer offers a retirement plan, saving for retirement becomes easy. You don’t need to do anything to accumulate a decent amount for your retirement, money is deducted from your salary automatically. If you are lucky, you will be a part of a retirement plan where your employer matches your contribution. This helps you have a nice little nest egg by the time you retire.
However, it is possible that you have an employer who does not offer you a retirement plan. This puts you in a difficult situation where you have don’t have a strategy to save for retirement. This situation would also be faced by freelancers and those who have started their own business. They wouldn’t have the facility of an employer providing a retirement plan. If you are in a situation where you don’t have a retirement plan, then you need to look for another option. This is important because saving money for your retirement is crucial.
Why save for retirement?
Once you retire, you probably will not have a job that can get you a monthly paycheck. You would continue to have expenses, even though you don’t have an income. How do you manage these expenses without a job? As you grow older, your healthcare needs would increase. Post-retirement, you would probably like to spend more time on travel and visiting places across the world that you couldn’t do while you were working. You would also want to leave some money for your children. All these require money, which you are not earning anymore. There is thus a need to create a nest egg or a substantial amount of money that can take care of your needs.
You may want a lump sum of money that you can use as you wish. Alternately, you may prefer an annuity to be paid for the money you have accumulated. This would work as a pension that would be paid to you every month and can take care of all your expenses. Someone used to getting a monthly paycheck would find a monthly pension convenient. It helps you lead a comfortable retired life without having to worry where you would get the money for your expenses. A retirement plan would help you manage your post-retirement expenses.
A retirement plan for you
If your employer is not offering a retirement plan, then you can opt for a retirement plan on your own. The IRA or Individual Retirement Account would be the best option for you if you want to start a retirement plan to save money. There are two types of such IRAs that you can consider. One is a traditional IRA and the other a Roth IRA.
A traditional IRA is one where anyone can start investing money. There is no income requirement stipulated to start a traditional IRA. You can contribute $6,000 every year to the IRA. If you are older than 50, you can contribute up to $7,000 annually. The traditional IRA offers tax-deferred savings. There is no income tax payable until you withdraw the money from your account. The advantage of the traditional IRA is that you can open two accounts, one in your name and the other in your spouse’s, even if one of you is not earning. So, you can save up to $12,000 annually without paying taxes on it. The idea behind an IRA is to save money for your retirement. You can withdraw money once you turn 59 years and 6 months. You can withdraw money early if you need it, but then you have to pay tax on it and you may also be charged a penalty.
An alternate IRA option that is popular is the Roth IRA. This retirement plan is named after Senator William Roth, who proposed this idea. This plan is popular because of its tax benefits at the time of withdrawal. When you invest money, you would be investing after paying taxes. The interest you earn and the amount you withdraw would be tax-free. It is similar to the traditional IRA, in that you invest up to $6,000 annually (or $7,000 if you are over 50). However, there is an income requirement. Your gross income, after adjustment, needs to be less than $122,000. You can withdraw your contributions anytime. You can start a Roth IRA even if you have an IRA account.
A variant of the IRA that would be suitable for freelancers and those who are self-employed is the SEP-IRA (Simplified Employee Pension Individual Retirement Account). For the purpose of taxes, it is treated in the same way as a regular IRA. This is beneficial as the minimum age for commencing investment is 21 years, with three years’ experience and earning at least $600 compensation. If your business is not doing so well, you can even skip contributions for a few years. The money invested can be claimed as a tax deduction. At the time of withdrawal, it would be subject to taxes. Withdrawal can be done once you reach 59 years 6 months of age.
The IRA in its different variants is thus a suitable option to invest money for your retirement. There are tax benefits available, depending on the type of account you invest in. The IRA is one of the best options to save money for retirement when your employer does not offer a retirement plan.
How much can you expect from an IRA?
The key to any investment account to build wealth is to start early.The later you start, the lesser you save. The ideal time to start saving for your retirement is in your 20s, when you start working. Assuming you invest for a period of 30 years (which means you start investing in your late 20s), your annual investment of $6,000 can yield you $300,000.Therefore, at the time of retirement, you can earn a lump sum of around $300,000. The question is whether this amount is sufficient for your retirement. Let’s do some number crunching.
A thumb rule on the amount you need to save is as follows. You should be able to earn 80% of your last annual income before retirement, through your retirement savings. Let’s assume when you retire you are earning $100,000 annually, so you would need $80,000. You can apply the 4% rule to determine how much you need to save. To earn $80,000 annually from your retirement fund, you need to save $80,000 divided by 4%, which works out to be $2 million. If you save 2 million, you can expect to earn sufficient money for your retirement.
Investing in a conventional IRA with returns of around 5% would earn you $300,000. This is a far cry from the $2 million you need to accumulate by the time you retire. So, what then is the solution? The 5% returns that your IRA earns is not really sufficient. You need to do something to earn a higher rate of interest from the money you invest in your IRA. The solution is investing in the stock market.
How the stock market can help you earn more?
Conventional saving options cannot help you earn much interest as these options are conservative in nature and do not take much risk. If you need more interest, you must be prepared to take more risk. The stock market is an option, where you can invest money to earn a higher rate of interest. This would carry a certain amount of risk, due to the volatile nature of the stock market. Stocks and related investments can make you a millionaire.If not managed well, you face the risk of losing your capital invested. This is the reason most people are scared of investing in the stock market. There is no doubt, however, that the stock market can fetch you handsome returns.
If you want to earn in millions for your retirement and thus have sufficient money to lead a comfortable life post-retirement, you need to consider the stock market. Your IRA can invest in riskier investment options like stocks, mutual funds, and index funds. Investing in this way can help you expect a rate of return of 8% to 12%, which can be useful to earn more for your retirement. The same $6,000 when invested in stocks can help you earn a million in 30 years. If both you and your spouse have IRA accounts of $6,000 each, you can easily save $2 million in 30 years.
The IRA thus allows you a build a substantial amount of money for your retirement that should take care of your expenses after you retire. You would also have social security benefits that would help you. That has not been accounted in these calculations. Whatever you get from social security is a bonus. Saving money for your retirement when you don’t have a plan from your employer is thus possible thanks to the IRA.
How to do it?
Now that you would have understood the role the IRA can play in helping you for your retirement, you would probably be ready to go ahead. Here are some pointers for you to keep in mind before you start the process.
1) You can decide on the asset allocation
An IRA allows you to invest your money in assets of your choice. You can choose to invest your money in safe options like bonds, where you would earn less interest but have the advantage of less risk. You can also choose to invest in stocks and mutual funds, where you can earn higher returns, with the risk being higher. You need to decide how you want to invest your money in both these types of options. You can choose to invest 70% in equity (stocks and mutual funds) and 30% in debt (bonds). This is a suitable allocation if you are 30 years of age. If you are 40, then you can invest 40% in debt and 60% in equity. The idea is that as you near retirement, you have less of risky exposure to equity.
2) Invest at an early age
As discussed earlier, when you start investing early, you can earn more interest. You can benefit from the power of compounding by earning interest on interest. The earlier you start, the more you can save by the time you retire. If you start investing when you are 25 and assuming you retire at 60, you can save money for 35 years, which is sufficient time to earn a lot of money. If you delay saving and start when you are 35, you can invest for only 25 years. The amount you finally earn will be lesser. The more you delay investing, the lesser is the amount you earn.
3) Don’t wait until tax day
To get tax benefits for the amount you invest in a year, you need to invest before the last date for paying taxes. Ideally, you should not wait until then, but invest money at the beginning of the year. This would earn more interest. You can even invest systematically every month, dividing your contribution over a period of 12 months.
4) Diversify your investments
As mentioned above, you can invest your money in stocks, mutual funds, and bonds. This ensures you are invested in multiple options that help in spreading your risk across different types of assets. You can spread your equity investments in mutual funds, stocks, and index funds to reduce your risk.
5) Go ahead and invest
You can open an IRA through a bank, financial institution, or a brokerage. Compare charges before you decide where to open your account. You can carry out your investment online for ease of operation. Don’t forget to name a beneficiary for your IRA, so your loved one would benefit if anything happens to you.
You are now ready to start saving for retirement even if your employer is not offering you a plan. Happy investing!
Investors remain worried about COVID, but positive towards stamp duty holiday
By Jamie Johnson, CEO of FJP Investment
The journey back to economic normality will be strenuous. COVID-19 has imbued many financial markets with a great deal of uncertainty, making accurate forecasts difficult for fear that a second spike in cases or further lockdown measures may affect market confidence at a moment’s notice.
However, ensuring investor confidence remains high in the short-to-medium term is paramount for avoiding economic stagnation throughout the rest of 2020. Without economic stimulus, the UK’s post-pandemic economic recovery will remain delayed until the virus is contained globally; and given the uncertainty surrounding when this will be accomplished, the economic damage inflicted in the meantime could be grave.
The Government, of course, has been quick to recognise this. It has implemented numerous policies designed to coax activity back to some key markets, most notably in the property sector.
The stamp duty land tax (SDLT) holiday especially seems to be succeeding in attracting buyers back to the market, with property listing site Rightmove recording an immediate 75% increase in buyer enquiries following the policy’s implementation. Meanwhile, Halifax’s August house price index (HPI) revealed a year-on-year average house price rise of 5.2%.
After months of the government dissuading people from moving home due to COVID-19 contagion fears, it seems as though the SDLT holiday is managing to release some of the pent-up demand for property that accrued during lockdown. Domestic and international buyers alike are now compelled to take advantage of the lucrative real estate opportunities on offer, with tax savings of up to £15,000 available during the holiday.
What is crucial, however, is that this momentum is sustained. As COVID-19 case numbers begin rising once again, if people view the UK as not having a handle on the spread of the virus, they may be reluctant to make any major decisions regarding their asset portfolio.
To explore how exactly investors are currently perceiving the government’s capacity for effective COVID-19 containment, and how they are managing their financial affairs during this challenging period, FJP Investment recently commissioned an independent survey of over 900 UK-based investors. Each of the investors surveyed has an investment portfolio in excess of £10,000, excluding savings, pensions, SIPPs and residential property.
What we discovered was that, although the SDLT holiday referenced above is being positively received, there are still obstacles to overcome within the wider economic bounce-back.
Among those surveyed, a quarter (24%) of investors stated they are planning on buying one or more new properties to take advantage of the SDLT holiday, a figure that rises to 43% for those aged between 18 and 34.]
Given the substantial potential discounts available, it makes sense that those keen on making their first step onto the property ladder – or building a real estate portfolio – would jump at the chance while market conditions are right. With the SDLT holiday period coming to a close at the end of March 2021, buyers will be keen on finalising their transactions before this key date.
However, 43% of the investors surveyed believed that more financial incentives and support should be offered by the government. Sticking to the property sector, over half (54%) think the mortgage payment holiday relief scheme should be extended beyond its current finishing date of 31st October 2020.
Elsewhere, FJP Investment’s research showed that 57% of investors are keen to see more financial relief for businesses that have experienced disruption to their cashflow due to the pandemic.
Facilitating the strong economic recovery
More worryingly for the government, however, is the current lackluster reception of its recent public health strategy. The majority (54%) of the investors surveyed admitted they had lost confidence in Boris Johnson’s government due to their apparent mishandling of the COVID-19 pandemic so far.
Increasing case numbers and unfavourable international comparisons risk deterring both domestic and international investors away from UK property – elongating pandemic-related economic stagnation for the foreseeable future.
Ensuring the government soon regains a reputation for good governance and epidemiological competence, then, should be an absolute priority for government advisers. Prospective investors – not just in property but all manner of UK-based assets – must have confidence their assets will not undergo a surprise devaluation due to factors outside of their control.
Personally, I’m confident that the right decisions will be made and the current boom in demand for UK property will be sustained. Investors will continue to be successfully attracted back to the market, and the UK can enjoy a prosperous real estate market once again – fuelling a wider post-pandemic economic resurgence across the nation.
Revitalising the token market
By Gavin Smith, CEO at Panxora
With interest rates near zero and fears that whipsawing stock markets are set for further plunges, many investors are turning to alternative markets in the search for returns. Money flowing into cryptocurrency hedge funds and trusts like Grayscale is at all-time highs and the large cap coins seem to be entering a bull phase, but that capital is not trickling down into new token projects. Why are blockchain token projects struggling to attract funding?
Seed investor scepticism
Setting aside the reputational issues with mainstream investors, even those educated in blockchain tech are not signing on the dotted line. This is certainly due in part to the hangover from the early token market.
During the heady days of 2016/17, investors could buy tokens during the token sale, and if the project was legitimate – even if the business case wasn’t particularly strong – prices would soar based on market enthusiasm. Early investors purchased at a discount and cashed out almost immediately for a handsome profit – and then repeated the process again. The token sale allowed founders to amass a war chest large enough to finance the entire token project – without having to give up a large chunk of company equity. Everyone got what they needed out of the deal.
Running a token sale is far more expensive today than it was during the boom. Getting the attention of the token buying public in a market where advertorial has replaced editorial is expensive. This coupled with a regulatory framework that requires the advice of accountants, solicitors and information gathering of KYC details for investors all comes with an escalating price tag.
To accommodate the change in cost structure, tokens now need to acquire funding in two rounds. Frequently there is a first round where capital is raised from a few, large investors. This cash is then used to finance setup and marketing the main token sale. The token sale, in turn, provides the capital needed to run the entire business project.
Bridging the gap between token projects’ needs and early stage investors
To successfully get a token through the capital raising process, founders must acknowledge the risk assumed by those very early investors and reward them appropriately. And given that tokens may stagnate or fall in price post token sale means that a deep discount in token price is not necessarily attractive enough to get investors to commit.
Many tokens have turned to offering equity in the business in the effort to raise that first tranche of capital. If you look at the number of successfully concluded token sales, the downward trend has continued since Q2 2018, so offering equity is not sufficiently stimulating the market.
Two sides of the coin
So, what is the answer? It’s a complex question but one thing is certain. Any solution must be rooted in a deep understanding of what both parties need to successfully conclude the deal.
On the one hand, token founders’ needs are clear: they need enough capital to get the token ready for and through a successful liquidity event that will provide sufficient funds to build the project. The challenge lies in striking the right balance between accruing that capital and making sure not to offer so much project equity that give up either the control or the incentive founders need to drive the project forward.
On the other hand, while the needs of the seed capital investors are more complex, there are two areas of key concern: transparency and profit incentives.
Transparency can mean many things, but almost always includes providing more informative cost and profit projections, as well as answers to a whole range of questions, not least the following:
- What happens to investor capital if the token sale event fails? Token founders must be transparent from the outset. The token market is highly speculative and early investors run the risk of losing their money should the project fail. Therefore, investors require a well-established fund governance process in place throughout the fundraising so they can make informed decisions on whether the project is worthwhile.
- How are the assets for the entire project managed? Investors need to know that their money is in good hands and that proper treasury management techniques are being used to manage cryptocurrency volatility risk. Ideally, an independent custodian will be used to hold the funds and limit founders’ ability to draw down the capital – releasing funds to an agreed-upon schedule of milestones.
- How are the rights of investors protected, for instance in the case of a trade sale? Investors need to know what happens if the company they are investing in is sold. What impact could this have on the value of their stake? Would a separate governance framework need to be established? These are critical questions and investors aren’t likely to settle for any ambiguity in the answers.
Profit incentives are important when it comes to encouraging early participation in a project. Investors need convincing that the proposition will keep risks to a minimum and focus on providing a strong probability of a return. This means that founders need to be able to defend the case for the increase in the value of their token.
But this isn’t the only incentive that matters. Investors can also be incentivised by preferential offerings such as early access to projects and services that might help their own business.
Let’s not forget that investors don’t support just any project. What really matters is that there is something special and unique about the business being underwritten by the token. Preferably something that could be shared upfront and directly benefit the investor – proof that the investment is really worth it.
And that’s what it all comes down to. Ultimately, while token projects are having a hard time finding funds at the moment, if they can prove their worth and provide full transparency and clear profit incentives to ease investors’ concerns, the money is out there. And deals can be done.
Achieving steady returns in challenging times for later life planning
By Matt Dickens, Senior Business Development Director at Ingenious
The macro-economic conditions of the last five years have presented a relentless challenge for money managers seeking to produce consistent returns. It seems an all too distant memory that UK markets were caught in a happy period of low volatility and positive growth since the recovery from the financial crisis started in 2009. Enter 2016 and we have since found ourselves in an era of exceptional uncertainty. An acrimonious Brexit referendum and the following ambiguity, pressure on sterling, repeated challenges to the UK Government, a trade war between two of the world’s super-powers and now a global pandemic. All this as the world is going through a digital revolution.
Under these exceptional conditions, many investment strategies have understandably struggled to sustain the growth that investors had previously enjoyed without taking on elevated levels of risk and experiencing greater volatility and its associated negative impact. However, Ingenious Estate Planning has been operating alternative investment strategies for several years, which have produced a steady return with low volatility over this time as they possess little correlation to the main listed markets.
The affordable end of the UK’s residential real estate market has proven to be extremely robust during the recent uncertainty. The market benefits from some core fundamentals that have assisted it withstanding a lot of the pressures experienced by other sectors. Firstly, a large and sustained supply deficit. In 2018 the UK built 80,000 fewer houses than the actual requirement of 300,0001. This strong, inherent demand poses a clear investment opportunity to investors who can fund construction projects in the safe knowledge that there is an established demand on completion.
Secondly, this supply deficit has been recognised by Governments for several years and there has been a raft of policies enacted, all supportive of building more houses. For instance, the Help to Buy scheme has enabled many, often first-time buyers onto the property ladder. This scheme means there is a well-established and subsidised group of buyers ready to buy whenever developers complete construction. Thirdly, and more recently, the Government has acted quickly to identify the property sector as one that is key to the UK’s recovery from Covid-19. Through relaxing planning laws and offering stamp duty holidays, both the construction and sales market are being given valuable incentives that support an ongoing return for real estate investors.
Secured lending model
Despite these positive forces however, there remain some risks with investing in the property market, so a conservative investment strategy is key to protecting investors. Rather than take a 100% equity, or ownership, position in a house-builder, developer or single property, a portfolio-based, secured lending model, has a number of clear risk-mitigating benefits. For instance, by lending to a portfolio of developers, carefully selected on a project-by-project basis, and by earning a fixed rate of interest, rather than taking equity risk, there is inherently lower volatility in returns given the protection of a senior debt position on each development. Contracts set out clear loan terms meaning that regular interest is paid on the investment and upon final sale the repayment is made in full, all with the benefit of banking-style security protections. By contrast, equity investments and associated valuations can fluctuate over time as the asset price changes and so it is far more vulnerable to market conditions and sentiment, and ultimately any drop in value is suffered by the investor. In the lending model, any loss is initially felt by the borrower.
Benefits for estate planning
Ingenious Estate Planning Private Real Estate utilises this secured lending investment strategy. The Business Relief- qualifying service is commonly used by clients planning for later life. As savers and investors reach retirement and decumulation, they present wealth managers with a unique set of investment problems. Without careful planning, the start of this phase for many could signal the end of any capital growth and herald their savings being eroded to pay for life’s needs. Any investment offering both high volatility and potential drawdowns may therefore become unpalatable. And while many would wish to gift savings to their children to mitigate the risks to their beneficiaries of paying a hefty inheritance tax bill upon their death, the thought of losing both control and access to these savings when they may still need them, means many feel uncomfortable in taking that step.
However, this does not need to be a fate accepted by savvy investors and planners who can utilise a proven trading strategy that continues to both carefully and predictably grow their investment while also providing potentially full relief from inheritance tax.
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