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Monday, June 21, 2010

Systematic Investing for your Retirement

Systematic investing, also known as automatic investing, is the process of allocating a set amount of your income toward specific investments at regular intervals, such as weekly, biweekly or monthly. Rather than investing money whenever you have some extra cash, or setting aside whatever is left after paying your monthly bills, you put your future financial comfort first by automatically contributing to your retirement account.

When you invest automatically, you're more likely to succeed because you avoid the temptation to spend your extra cash. Instead, you put your money to work for your future — conveniently, regularly and automatically.

How to invest automatically?

It's easy to take advantage of a systematic investing plan. In fact, you most likely are already applying this strategy if you are participating in an employer-sponsored retirement plan or making regular investments into a mutual fund account. Here are several ways you can invest automatically and potentially boost your retirement assets:

Defined contribution plans: If you participate in your employer's retirement plan, you are taking advantage of systematic investing. These plans let you contribute a specific amount from each paycheck before taxes. And you can change the amount of your contribution at any time, up to the limit.

Payroll savings plan: If you don't have an employer-sponsored retirement plan, you can use this service to systematically invest in an annuity and build your retirement reserves. Most employers offer some type of payroll savings plan, which lets you automatically transfer money from your paycheck to a bank or investment account you specify.

Mutual fund accounts: Mutual funds generally offer two ways to invest automatically. First, most mutual fund companies offer a systematic investment plan, which lets you make regular contributions from your bank checking or savings account directly into your mutual fund account on a schedule you select. (Note that most systematic investment plans require a minimum monthly investment of Rs. 500 or Rs.1000) A second option is to elect to reinvest your dividend and capital gains distributions back into the fund rather than to receive them in cash. This means you systematically invest every time your fund makes a distribution.

Individual stocks: Similar to mutual funds, when you purchase individual stocks, you may have the opportunity to participate in a systematic investment plan and a dividend reinvestment program.

Annuities: When you purchase an annuity, you can systematically invest by making regular payments. Each payment is then proportionally allocated to the subaccounts you have selected.

Save while you invest

In addition to creating automatic discipline, systematic investing can also help you reduce your average cost per share if you apply a strategy called dollar-cost averaging. This strategy involves purchasing shares on a set schedule (weekly, monthly, quarterly), regardless of the market's short-term performance. This will result in the purchase of more shares when prices are low and fewer shares when prices are high. Over time, this may lower your average cost per share, as illustrated below, and help smooth out the effects of market volatility.

Regular Investing + A Sound Strategy = Success

Investing regularly and automatically is an ideal way to make your retirement fund a lifelong priority. But in addition to making a commitment to investing, you need to select investments that align with your goals, retirement timeframe and tolerance for risk. For example, you may want to consider investing in an actively managed portfolio that pursues a specific strategy or style, such as long-term capital appreciation or moderate growth, or in an account that pursues a particular goal by a target date that matches your expected retirement date.

Investing a set amount of money automatically and at regular intervals ensures a portion of your income always supports your long-term retirement goals. You can evaluate a variety of systematic investing strategies, as well as other options within the four cornerstones of your financial picture — cash and liabilities, investments, protection and taxes — so you can more confidently save toward your retirement dreams