Retirement money
Photo by: Billy Alexander (Stock Exchange)

Every time there’s a dip in the stock market or a big company falls into dire straits, you can hear people fretting about three things: debt, the mortgage, and the value of their 401(k). For many, a 401(k) is a critical part of retirement savings. For others, especially young folk entering the workforce or professionals for whom retirement is a long way away, the 401(k) is something else entirely: a mystery, off in the unforeseeable realm of the future.

But, as with any long-term savings goal, the sooner you start saving for retirement, the sooner you can plan to enjoy it. Since retirement can mean many years of your life – and there’s just no telling what kind of Social Security protections or other government programs will be healthy twenty, thirty, or forty years down the line – it’s important to start thinking about it now. So we begin with an introduction: just what is a 401(k)?

The 401(k) and You

Put simply, a 401(k) is a kind of savings plan that allows you to put money aside for retirement and protect that savings and its interest from taxation until you’re ready to use it. Until a worker reaches the age of 59.5 or is ready to leave company service for retirement, there are serious restrictions on withdrawing any funds from the plan. In practice, this is because companies, through a third-party plan administrator, are engaged in investing the value of employees’ 401(k) plans, and (hopefully) growing them.

Pros of the 401(k)

Though the amount of money an employee can contribute to their plan is capped at a certain percentage of their wages, every dollar you contribute reduces your taxable income and lowers your tax burden. Because no taxes are taken “off the top” of your contributions, your investment can start to accrue more interest sooner. And in many cases, companies will match your contribution on a percentage basis, chipping in a quarter or more for every dollar you add. That is a big deal, and compares favorably to investment opportunities that are taxed before the money starts really working for you.

Cons of the 401(k)

Over three-fourths of companies with 100 or more full-time employees offer a 401(k), but it still may not be the right investment tool for you. Because of stiff penalties against withdrawing from your 401(k), don’t expect to use the earnings to pay bills or reduce credit card balances, even if unforeseen circumstances require emergency spending. Further, and most frightening, 401(k) money can be endangered in a number of ways: if it’s heavily invested in the stock market, for example, it’s subject to the same risk as other non-diversified investments.

Conclusion

Overall, a 401(k) is a very strong long-term investment if backed by a reasonable rate of contribution matching from your employer. Lately, though, many major firms that used to provide strong matching have backed down in an effort to curb expenses. This can have a huge impact on your 401(k)’s earning potential over time, but there are still steps you can take to ensure a healthy fund for retirement. We’ll discuss more in a future post.

South African Krugerrands
Photo By Lyudmila Green

The stock market has been as volatile lately as a poker table at Las Vegas casino. Many traditionally conservative investments have seen unheard of volatility. Savers have begun asking the question, “What can I invest in to make sure I at least keep the principle of my investment?” For many investors, gold has come up on the list of options.

Before buying a boat load of gold, one should consider the reasons gold is valuable and what gold is useful for in terms of investments. Gold has industrial value, but there is frankly plenty of gold that is already mined and available for industrial purposes; so much so that you can easily find 30$ gold plated 2 foot S-Video cables at your local electronics supplier. Gold is useful either to preserve an investment, or as a hedge against falling currency. If you feel currency is unsafe, or your portfolio is overexposed to a specific currency, adding gold to your portfolio could be wise.

A wise investment rule has always been to diversify. Many investors wrongly get the impression that this means buy some tech stocks, as well as some utility stocks. A diverse investment portfolio, however, is not simply having a bunch of stocks; it is having a diverse set of investments. Gold is not a bad thing to add to that basket, which should include not simply stocks, but also real estate, material investments, proper insurances, and other assets that are not exposed to currency risk.

A mistake often made with gold is to treat it as a stock. Indeed, many who hear that gold is a great buy, run out and buy stock in a mining company or two. As mentioned above, there’s already tons of gold that’s already been mined; purchasing a mining company’s stock would really be a bet that either there is going to be a ton of gold mined, or a massive shortage of gold on the market.

So what should a gold saver purchase? Low-premium bullion gold. Bullion is a fancy word for coins, or other forms, of a metal that are only valued by the amount of the metal inside. There are coins that are made with gold that are valuable because they are old, or rare. That is not bullion. A bullion coin is one that you can set on a scale and immediately know its value based on daily spot gold prices. Anyone selling you a stock, or a certificate, isn’t really selling you gold. If you cannot hold it in your hand you’ve been sold a different type of investment.

What does low premium mean? Well, for instance, the US Government sells 1-ounce ‘American Eagle’ coins. These contain an ounce of Gold. The South African government also sells 1 ounce gold coins called krugerrands. American eagle coins contain the same gold as a krugerrand but American Eagles cost more; if you’re just looking to buy gold why pay more?

Bottom line? If you’ve decided that you are worried about a falling dollar, or worried about the risk of ‘traditionally conservative’ investments failing to preserve your investment, its time to buy gold. If you’ve determined to buy gold make sure that you buy gold you can hold in your hand, which is not more expensive because there’s a name on it.