Going It Alone
One way to bolster your retirement nest egg is to open an individual brokerage account. When you first start putting money into the account, invest in growth stocks, which don't have tax-laden dividends to deal with, thus keeping your retirement plan tax-free until you're ready to dip into it. With these stocks and their earnings in your portfolio, the power of compounding interest and inflation will produce "unrealized growth," says Lanzaro. "If I was [in the early stages of] planning my retirement, I'd want growth at the beginning and income at the end," he says.
As you get older, rebalance your portfolio with somewhat safer value plays and sell the growth stocks. You'll incur a capital gains tax rate, but it's still lower than the income tax rate and interest that accompanies dividend stocks and bonds, respectively, says certified financial planner Elaine Morgillo. For most investments, long-term gains (for assets held more than one year) are taxed at a maximum rate of 15%, while short-term gains are taxed as ordinary income.
Of course, most people don't want to be responsible for the research that goes into picking stocks and other investments. That's why it may be best to put your money into a target-date mutual fund that is based on the year that you plan on retiring. These funds, which invest in a mix of cash, bonds and stocks, rebalance on a regular basis. As you approach your estimated retirement date, the portfolio becomes increasingly more conservative.
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