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Retirement Planning - Assignment Example

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Summary
One of the long term goals of all people that work for a living is to save money for retirement. Retirement planning can be defined as the process of determining retirement income goals and the actions and decisions necessary to achieve those goals (Investopedia, 2012)…
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My plan is to work in the private industry for 40 years to then retire. Retirement is very important because it represents the golden years of a person’s life. People expect to enjoy retirement with their love ones. In order to truly enjoy retirement it is important to be financially independent. I will graduate at 25 years of age. The average salary I expect to earn during my career will be approximately $50,000. A retirement calculator on the CNN Money website was used to estimate my retirement goal.

My retirement goal is to save $500,000. My expected retirement age is 65 years of age. I estimated my life expectance at 78 years since that is the average life expectancy in the United States (CultureGrams, 2012). My expected pension income and social security income are $1000 each. Based on these variables the retirement calculator gave the following output. Your Results You will need a total of $1.7 million ($496,418 in today's dollars) to retire at 65 years old (Cnn, 2012). The second tool available at the CNN website was an asset allocation display.

I stated that I needed the money in 20+ years. I selected that I was willing to take a reasonable amount of risk. I stated I could not afford to miss my target and during market sell-offs I see an opportunity to buy more stock. The result of the calculator is illustrated below: Suggested allocation: (Cnn, 2012). The suggested allocation provided by the CNN calculator provides a list of potential allocation of assets. My plan to save $500,000 by retirement age can be achieved if I implement a proactive saving strategy that uses a wide arrangement of investment and retirement tools.

Three retirement instruments that I plan of use as part of my diversified portfolio are IRA, Roth IRA, and 401k plans. An IRA is a retirement savings account that allows taxpayer to save money without paying taxes for the income placed in the IRA account. Money placed in an IRA account accumulates interests every year. The money cannot be taken out of the IRA account until retirement age reaches. Bottom of Form A Roth IRA is, “An individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax deductible and qualified distributions are tax free” (Investopedia, 2012).

A 401k plan is a company sponsored retirement plan that allows individuals to set aside tax-deferred income towards retirement. There are other financial instruments that can be used to save money towards retirement. One of the most popular forms of investments is common stocks. Common stocks give investors ownership in a publicly traded company. The investors that keep stocks for a long time earn dividends from common stock as well as a capital gain once the investment is sold. The safest type of stock that an investor can choose is blue chip stocks.

A blue chip stock is a stock issued by a well known company with an established record of making money and paying dividends (Teweles, Bradley, Teweles, 1992). An example of a blue chip stock is Microsoft. Due to the risk associated with penny stocks and foreign stocks I will stay away from these two types of stocks in order to minimize the risk of the portfolio. Another good investment instrument that is often chosen by investors is corporate bonds. Corporate bonds pay the investor the coupon rate on a yearly or biannual basis.

The principal of the bond is paid at maturity age. Most bonds are of $1000 denominations. A portion of my retirement

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