Where Should You Put Your Retirement Money?

There are as many opportunities to grow money as there are people with great ideas. Some people choose to save for retirement outside of the conventional vehicles like 401(k)s and IRAs.

When systemic market failures surfaced around the globe in 2008 and caused massive market turmoil, seasoned investors as well as novices were caught off guard. What was supposed to be safe turned out not to be. Many Americans who were counting on the appreciated value of their homes to convert to a stream of income for retirement were left vulnerable, finding themselves with far less to work with than they expected.

Another example of misreading risk has to do with asset allocation, which is a risk reduction strategy where you divide your money among a variety of investment types that do not go up or down in value at the same time. Diversification reduces risk. However, when markets recently stopped functioning and there were few if any buyers of anything, pretty much everything dropped in value. In a severe down market asset allocation does not necessarily protect you very well from loss the same way it does in an up market. For many people, all their assets declined in value.

Without succumbing to fear, it is generally prudent to assume you are facing greater risks than meet the eye. This means staying alert, vigilant and knowledgeable and, most importantly, being open to changing direction if need be.

Following is a survey of types of investment what you might consider before making choices on saving for retirement. It is important to know your criteria. What is important to you? What is going to allow you to sleep comfortably at night?

Financial institutions

If you are looking for tax benefits as you save for retirement, invariably you will need to work with one or more financial institutions, such as banks or brokerages. The IRS requires you to put tax-qualified retirement savings in the hands of an approved custodian --- usually a financial institution. Whatever funds you have placed in their hands are known as custodial holdings. In this day and age of mergers and acquisitions and rapid invention of new investment products, there are increased unknowns around institutional reliability. Fortunately, unless the investment itself goes sour, there is a fairly robust firewall between the fortunes of the custodial institution and the safety of your investment. However, when the public perceives institutional weakness they may want to pull assets out and, if they do, this could drag down investments you have with the custodian in question for no good reason.

It is more difficult to identify good companies given that large financial institutions are becoming one-stop shops with a huge variety of types of products and services. For example, insurance companies buy and sell lines of products from one another, which means that your insurance policy or contract may not stay with the company from which you purchased it. In addition, servicing companies are often hired to handle customer relations.

The primary institutions that handle retirement investments are insurance companies, banks, investment and asset management companies, and governments --- local, state, and federal.

Insurance companies offer products protecting against loss. For retirement purposes, annuities, along with long-term care insurance, are the main insurance company products of interest. For the most part, annuities do not benefit from sitting inside retirement plans since they already enjoy certain tax advantages. Capital gains, interest, and dividends occurring within any annuity go untaxed until funds are paid out of the contract. There is no "double" tax-deferral benefit from having an annuity within an IRA or 401(k).

Insurance products can be purchased from the companies directly but more commonly are available through brokers -- some who sell products from different carriers and some who sell only for one company. You should either visit different companies for quotes or use an independent broker.

Investment and asset management companies comprise the institutional backbone of retirement saving. These companies are regulated by the federal Securities & Exchange Commission (SEC) and by state securities divisions. Investment and asset management companies serve three functions: custodians of your accounts, providers of services and investments, and "making a market" (where a sufficient number of buyers and sellers trade goods, services and securities). You may have a custodian who has no direct involvement with your actual investment. For example if you own 10 shares of stock XYZ and it is held in an IRA brokerage account at ABC Investments, ABC has nothing to do with XYZ directly but must keep tabs on your account and find a buyer for your stock should you elect to sell it and execute the transaction.

Part of making a wise selection around who you want to be the custodian and manager of your money is knowing how much help and guidance you want and need. You may find yourself with multiple custodians and investments if you have had several employers with different 401(k) plans or have inherited portfolios. It may take some doing to organize your holdings so they are manageable.

Banks(including commercial banks, cooperative banks, and credit unions) offer savings products that can be appropriate for retirement planning. Many of the largest ones now provide investment and insurance products and services as well.

The U.S. government provides retirement savings products directly to the public in the form of bonds. A relatively new Web site, www.TreasuryDirect.gov allows you to find products that you can purchase directly through the Web site. U.S. government savings products can also be purchased through banks and investment management companies.

Types of investments

Just because there are tax-qualified retirement programs does not mean you must use them to fund your retirement. Remember, the objective is always to create a stream of income to handle your expenses from the day you retire until the day you die. If you have a different way of creating sufficient passive income to take care of you in retirement, then do it!

Cash and cash equivalents are the starting point for investing. This category includes cash in your pocket, checking and savings accounts, money market accounts and, when you own mutual funds, the cash portion of the fund that is usually invested in short-term debt. Typically, these investments pay low interest rates. They make sense when safety and liquidity are the prime objectives, giving you instant access to your money, However, even money markets can be vulnerable if demand dries up for whatever investments it holds during skittish markets.

Fixed income investments are debt instruments, meaning they are asking to borrow money from you and in return they will pay you interest plus return the principal at a specific date in the future. The simplest form this takes is Certificates of Deposit (CDs) which have maturity dates ranging from three months to five years. All government offerings are fixed income investments. The U.S. Treasury sells Treasury Bills, Treasury Notes, Treasury Bonds, Treasury Inflation-Protected Securities (TIPS), Savings Bonds, and EE/E Bonds. Municipalities, states, various special purpose authorities, and quasi-governmental authorities all sell debt. In addition, corporations raise money selling bonds in the open market. The riskier the venture issuing the bonds, the higher the interest rate you should expect to be paid.

Equities or stocks come to mind whenever you think of long-term investing. They are securities which, when owned, give you actual ownership of the company. Today, institutions (like other businesses, pension funds, mutual funds, investment houses, etc.) own most of the shares of the largest, most prominent publicly-traded companies. Equities are considered a good place to invest in a rising economy. Some pay dividends, providing income even if the value of the stock has dropped.

There are also groupings of stocks, called indexes, based on some classification characteristic. These are helpful to get a quick indicator of how well a grouping is doing as a proxy for that segment of the overall economy. Size is used as one classification characteristic. Another is industry sector.

Mutual funds were invented to tap into that large pool of capital sitting in the hands of the less well-to-do. In the United States, mutual funds were created in Boston in the 1920s. The new industry did not recover from the Depression until the mid-1950s. Since then it has continued to expand, with trillions of dollars invested today and more than 10,000 mutual funds available to consumers.

The mutual fund concept pools dollars from many investors into one investment vehicle comprised of a grocery basket of individual securities, including stocks or bonds or other investments, all depending on the objective of the fund. Investors enjoy the benefits of diversification and can put together a portfolio to match their risk tolerance, goals, and financial situation. 401(k) and similar programs offer enormous choice in funds for participants.

Exchange traded funds (ETFs)trade like individual stocks but are a collections of many stocks or other securities. ETFs experience price changes throughout the day as they are bought and sold, whereas the price of a mutual fund changes only once, at the close of business each day. Rather than redeeming shares from the mutual fund company, owners of ETFs who sell receive their money from ETF buyers on a stock exchange. Like mutual funds, ETFs offer diversification and are typically structured to represent an index of underlying stocks, bonds, or commodities. You get the benefit of 20, 30, or more individual holdings you might not be able to afford to buy individually. A disadvantage of ETFs is that trading volume can be erratic, which can result in large spreads between what a seller wants and what a buyer is willing to pay. An advantage is no minimum purchase is required, although you do have to pay a commission to buy or sell.

Separate accounts are mutual fund-like accounts managed by a brokerage company or financial advisor. They differ from mutual funds in that the individual actually owns the individual securities, which are pooled with those of other investors. (Separate accounts are not to be confused with subaccounts or separate accounts in insurance products.)

Precious metals are an investment often held by true believers. People who trust the physicality of a metal are attracted to it as a reliable, dependable investment that has a tangible, measurable, marketable value no matter what is going in world economies or in high finance. Precious metals are perceived as a hedge against inflation or trouble in the financial markets.

Precious metals can qualify for inclusion in a retirement account like an IRA, but under the IRS rules you must invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the U.S. Treasury. You can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. And you can avoid the rigmarole of direct ownership by purchasing precious metal mutual funds.

Collectibles are essentially prohibited as investments in tax-qualified retirement accounts. This would include such items as artwork, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and other collectibles. However, that is not to say you cannot earmark them for your retirement and sell them on the open market when the time is right. Be aware that highly appreciated items may incur a significant capital gains tax, especially if the items were acquired for next to nothing and have now become extremely valuable.

Real estate is one of the overlooked allowable investments for tax-qualified retirement purposes. Real estate can be purchased directly using money already within an IRA, although you cannot live on the property or incur any direct benefit. These are somewhat complex transactions and you give up tax benefits typically associated with real estate ownership; however, in the right circumstances with the right guidance a real estate IRA could be appropriate.

Aside from a tax-qualified real estate venture, the most common retirement savings strategy is to invest in one's own home, eventually paying off the mortgage and then coming up with an exit strategy since the IRS permits a tax-free gain of $250,000 on the sale of one's residence for an individual or $500,000 for a couple as long as certain requirements have been met. But with housing markets barely recovering from the slide in values, it may mean rethinking one's dependence on equity in a primary residence as the cornerstone of funding retirement.

Businesses have long been used a ticket to retirement. There are many ways to use a business to fund retirement. These include crafting company retirement plans that permit the owner to direct sizeable assets to fund his or her retirement to growing a business with an eye to either selling or stepping back from day-to-day operating responsibilities and taking some form of distribution or compensation. Consider buying a business to run in retirement. Obviously, operating a business is not for the faint of heart, but if your skills and comfort match up well with a business opportunity, it may be right for you. Related to ownership of a business is ownership of rental property where you can generate enough cash flow to cover property expenses with enough left over to supplement retirement income. Another way to generate income is to receive royalties or licensing fees for intellectual property you created and protected.