Retirement Planning - Assignment Example

The purpose of this paper is to discuss the different investment alternatives that I can use to develop a solid retirement plan. The biggest investment that people have is their homes. Despite the falling real estate market that occurred as a consequence of the recession of 2008 homes historically gain a lot of value over time. In 2012 the value of homes in America rose by 5.9% (Humphries, 2013). Buying a home is the first step towards financial independence. People that pay rent are throwing their money in the trash.

An advantage of purchasing a home is that the interests from the mortgage on your first home are tax deductible. A good way to create wealth is by purchasing additional homes for rental. The rent typically pays for the majority of the mortgage. Upon retirement age a person can sell their second house to obtain a large sum of money. One of the best places for people to invest money towards their retirement is the stock market. The biggest stock exchange in the world is the New York Stock Exchange (NYSE).

The most common investment instruments sold in the stock market are common stocks. A common stock is a security that represents ownership in a corporation (Investopedia, 2013). Owners of common stocks have voting rights. People can earn money from common stocks from equity appreciation and payment of dividends. The price of common stocks fluctuates every day. The average annual return on common stocks is 9.4% (Observationandnotes, 2009). One of best type of stocks to invest in is blue chip stocks.

Blue chip stocks are stocks issued by a well know company with an established record of making money and paying dividends (Teweles, Bradley, Teweles, 1992). Three examples of blue chip stocks are Microsoft, McDonald’s, and Dell. Two types of stocks that have higher risks are foreign stocks and penny stocks. The average return of foreign stocks is 15%, but the standard deviation on the return is much higher (Ahl, 2004). Risk adverse investors should stay away from these types of equity instruments particularly penny stocks.

Another type of stock that investors are often attracted too is preferred stocks. The difference between a common stock and preferred stock is that preferred stocks do not have voting rights, but dividends are guaranteed. It is important for investors to compile a diversified portfolio. Diversification can help investors lower their overall portfolio risk. The money market is another option for investors that are looking to save money towards retirement age. The money market is a financial market in which funds are borrowed or lend for short periods as distinguished from the capital market for long term funds (Teweles, et al., 1992). The best and most common money market instrument is treasury bills.

Treasury bills are 90 day loans that the federal government sells to investors. The best attribute of a treasury bill is that it is a risk free investment. The federal government has never defaulted on its obligations. The federal government also sells debt instruments that mature in six and twelve months. Another popular debt instrument is bonds. A bond is a long term loan that investors give to a governmental agency or a private institution. Bonds sold by corporations are often referred too as commercial paper.

An investor that invests in a bond obtains interest known as the coupon rate. Once a