5 steps to retirement planning
Retirement planning investment strategies
How to invest your retirement savings
Everyone should know by now that you need to prepare for retirement. But what people don’t always know how to plan for retirement and what the best retirement investment strategies might be. Whether you’re just starting out in your 20s or reaching the pinnacle of your career, you should start investing for retirement right away. In this article, we’ll walk you through the top strategies for retirement planning. Then, we’ll reveal the top tips on how to invest your retirement savings. You’ll learn not just how to save for retirement, but then put those savings to work so that they grow while you sleep.
5 Essential Retirement Planning Strategies
Retirement planning requires some forward thinking, and it’s never too early or too late to get started. The best retirement investments will depend on where you are in your career and your future goals. Often, your retirement management plans will evolve over time. Here are five key steps to follow as you begin your retirement planning:
Establish A Timeline: The age you want to retire will serve as the starting point for any future plans. First, it lets you know how much time you have to prepare your finances. Next, it allows you to analyze investment potential with your ideal timing in mind. This will be crucial when finances get involved.
Estimate Spending Needs: Almost every retirement planning tool out there will ask what you want your income to be after retirement. This number again will serve as a baseline for your planning. Try to create realistic expectations, and leave room for unexpected costs such as medical expenses or travel.
Look At The Numbers: As you prepare to build a retirement portfolio, consider the potential tax implications. Many investment options, such as IRAs, have options to choose to be taxed now or in the future when you withdraw the funds. Also take time to consider how certain investment gains are taxed, as this will impact your future returns.
Find A Risk Vs Return Balance: No matter what age you are when you start planning for retirement, it’s important to assess your level of risk tolerance. In general, the closer you are to retirement the more risk averse you should be when building a portfolio. However, the right asset allocation will depend on a number of factors. Consider how diversification can buffer potential risks and weigh a variety of options.
Create An Estate Plan: Many people forget to consider how Estate Planning factors into retirement. But, it’s crucial to take the appropriate legal steps to decide how your assets will be distributed after you are gone. This is also an opportunity to consider adding life insurance, to add future financial security for you or your spouse.
[ Thinking about investing in real estate? Register to attend a FREE online real estate class and learn how to get started investing in real estate. ]
Top 10 Investment Strategies For Retirement Planning
Later in this article, we’ll discuss how exactly you can put your retirement savings to work. Before we can even get to that discussion, you’ll first need to master the basics of saving for retirement. This includes different types of savings accounts, benefits to take advantage of, and what to avoid. Here are the most recommended retirement investment options:
Contribute To Your 401K
Open An IRA Or A Roth IRA
Open A Health Savings Account
Be Aware Of Retirement Fund Fees
Buy A Fixed Annuity
Utilize Saver’s Credit
Delay Social Security Benefit Collection
Prepare For Inflation
Assess Risk Tolerance
Create A Withdrawal Strategy
1. Contribute To Your 401K
Consider yourself lucky if you have an employer who sponsors a 401(k) plan. Consider yourself even more lucky if they offer 401(k) matching. According to Investopedia, a 401(k) is a tax-advantaged retirement account sponsored by employers. As the employee, you make contributions through automatic payroll deduction. This has the added benefit of lowering your taxable income.
Do your best to contribute as much of your paycheck as you can, especially if there is a minimum to qualify for employer matching. The IRS states that the contribution limit in 2020 is $19,500. Employees over the age of 50 are allowed to make additional catch-up contributions of $6,500. One thing to be careful of is to ensure you don’t touch these accounts until you reach retirement age. Otherwise, you will be heavily taxed if you make a premature withdrawal.
2. Open An IRA Or A Roth IRA
If your employer doesn’t offer a 401(k), then don’t worry, there are other options. An IRA, or an individual retirement account, holds similar benefits to a 401(k). It offers tax-deductible contributions and tax-free growth. The only real downside is that you have to open up and maintain the IRA yourself through a private financial entity, like a bank or brokerage.
If you’re concerned about making tax-free withdrawals during retirement, then consider a Roth IRA. The Roth IRA differs from a traditional IRA in that you make after-tax contributions. Once you’ve made your contributions, your money actually grows tax-free. With a traditional IRA, your earnings don’t get taxed while you hold the account, but you will get taxed later on when you’re making withdrawals. Both options offer advantages and disadvantages, with neither being superior. It’s a matter of selecting the option that best fits your retirement goals.
3. Open A Health Savings Account
The harsh reality is that your health expenses likely will increase significantly in your golden years. In fact, Fidelity Investments estimates that a couple in their mid-60’s retiring today could pay $285,000 in healthcare and medical expenses during retirement. Keeping this large sum in mind, preparing as early as possible is necessary.
Health Savings Accounts (HSAs) are a great way to start preparing ahead of time. These accounts are similar to 401(k)s but are intended to pay for healthcare expenses. Contributions are tax-deductible, any growth is tax-free, and withdrawals are tax-free if they are spent on qualifying healthcare expenses.
4. Be Aware Of Retirement Fund Fees
When researching what type of retirement investment strategy you’d like to follow, be sure to double-check the fine print and find out what fees you’ll be charged. For example, mutual funds charge portfolio-management fees.
Do your research and identify options that charge the lowest fees possible. If fees are unavoidable, then make sure your money is going toward a product of value. You don’t want these fees to add up and start eating away at your bottom line.
5. Buy A Fixed Annuity
The idea of outliving your savings during retirement is a scary concept. Another scary scenario to think about is your retirement investments performing poorly. What you can do to hedge and protect yourself against these outcomes is to invest in an annuity. A fixed annuity is an insurance product that will provide you with a set income for a certain amount of time. The timeline of when you begin to receive benefits, and for how long, are dependent on what type of fixed annuity you buy.
6. Utilize Saver’s Credit
If some type of tax credit is available to you, then always take advantage of it. Based on your adjusted gross income (AGI), your IRA or 401(k) contributions can get you qualified for a tax credit. These are credits that can help you save significantly in your income taxes each year. You can receive up to $1,000 if you are filing alone, and $2,000 if you are married and filing jointly. The credits you receive are based on your personal contributions, so it’s an incentive to start putting more towards your retirement plan.
7. Delay Social Security Benefit Collection
Some savvy retirees will delay their collection of social security benefits. The full retirement age (FRA) under the social security plan is currently 66. Did you know that the longer you wait, the more you can collect? For example, a retiree who waited until the age of 70 could potentially increase their annual payments by 8 percent.
Another tip is to be strategic with your partner if you’re married. If you have a substantial difference in income, it would be wise to wait to start collecting. This way, you can collect the benefits under the higher earner in the couple.
8. Prepare For Inflation
It’s great if you are tucking savings away for retirement and letting those savings grow. However, have you stopped and thought about whether that growth will be enough to beat out inflation? On average, the inflation rate has been roughly 3 percent. For instance, the inflation rate in February of 2021 was 1.7 percent. It rose to 7.9 percent a year later in February 2022, which is over four times. This one-year range shows the volatility of inflation and how quickly our money can lose value. Any amount of money we save today will be that much less valuable in the future.
Whatever you’ve calculated as your retirement savings goal will be less valuable in the future because of inflation. In other words, it might not be enough. Whatever investment retirement strategy you put together might be, be sure to account for inflation.
9. Assess Risk Tolerance
When considering different retirement investment strategies, make sure to take your risk tolerance into account. Some types of investments might offer higher returns but are often associated with higher levels of risk. Not all investments are created equal, so you’ll want to make sure that you feel comfortable with the portfolio you create.
10. Create A Withdrawal Strategy
You’ve saved up a nest egg for retirement – great! However, have you thought about how much, and how often, you’ll be withdrawing from your retirement accounts? Will you be slammed with penalties with each withdrawal?
A withdrawal strategy is an important but often forgotten aspect of saving for retirement. Although it might be a problem for tomorrow, you may regret not considering this aspect. When you’re actually retired and depending on your retirement income and nothing else, fees, taxes, and penalties could sting that much more.
Experts recommend creating your withdrawal strategy at least 5 years before you retire. This is something you should definitely address with a financial advisor.
[ Want to learn what Active vs. Passive Income looks like for stock investors like you? Find out how you can take advantage of Passive Stock Investing in our FREE webinar! ]
The 11 Best Investments For Your Retirement Savings
Perhaps the biggest drive for investors is the idea of achieving financial freedom, especially in retirement. If you have any savings, it would be foolish not to put your money to work so that it grows while you sleep.
If you’re late in getting started with saving for retirement, then investing is even more critical. By investing wisely, you have a good chance of making up for lost time. However, you’ll want to be careful not to jeopardize your money by being too bullish. Investing involves a juggling act between risk and return. Here are the top 10 retirement investing strategies to help you balance between the two:
Create A Total Return Portfolio
Utilize Retirement Income Funds
Use Immediate Annuities
Utilize Variable Annuities
Invest In Rental Real Estate
Keep Safe Alternatives
Real Estate Investment Trusts
The Federal Thrift Savings Plan (TSP)
1. Create A Total Return Portfolio
A total return portfolio focuses on providing the best possible mix of investments to mitigate risk. This is in comparison to a cash flow portfolio, which focuses on getting you the highest possible returns. Remember: the higher the returns, then the higher the level of risk you’ll likely have on your hands.
A total return portfolio offers a predetermined withdrawal rate, around 5 to 7 percent per year. The goal is to obtain an average annual return that will be equal to, or greater than, your withdrawal rate. Keep in mind that the annual return is an average over a 10- to 20-year span. You will experience some fluctuations subject to market conditions. However, this investment approach is a sturdy way to protect yourself against risk and ensure stability in the long-run.
2. Utilize Retirement Income Funds
Retirement income funds are like mutual funds, where your money is invested automatically across a mix of bonds and stocks. (This is not dissimilar to how a robo-advisor works.) The main goal here is to produce income, to be distributed to you monthly.
If you have a higher monthly income in retirement, the fund may use some of your invested principal to meet your payout target. Other fund types might pay out a lower sum to help preserve the principal amount you invested. A major benefit of a retirement income fund is that you retain full control and can access your principal investment if needed. (Although you’ll want to avoid doing so unless you are withdrawing your money to re-invest the funds into a better option.)
3. Use Immediate Annuities
Want guaranteed income for life? If you dislike uncertainty and want to guarantee your retirement income, then an immediate annuity may be a good fit.
These are like purchasing an insurance policy: for a lump-sum payment, you’re guaranteed to receive a set income for a predetermined time frame. This is a great option to familiarize yourself with, especially if you have little to no sources of guaranteed retirement income.
4. Utilize Variable Annuities
Although they may have similar names, immediate and variable annuities couldn’t be any more different. While immediate annuities are like purchasing insurance, your money goes into an investment portfolio in the case of a variable annuity. In this case, your investment rides the gains and losses of that portfolio.
Variable annuities allow investors to add riders for an additional price. These are guarantees or protection plans that can help cover you in a variety of scenarios. Riders come in many shapes and forms, but in short, they protect you to make sure you still get an income for life. This is a smart protection to put in place should anything happen to your investment portfolio.
5. Purchase Bonds
Bonds may very well be one of the safest retirement investment strategies available on the market. A bond represents a loan (an IOU if you will) from the government, a corporation, or a municipality. In this case, the borrower guarantees interest payments for the duration of time your money is loaned to them. Once the bond reaches its term, you receive back the principal, plus the amount of interest you’ve gained throughout.
This is a great way to secure a steady income stream in retirement. In addition, bonds typically have high-quality ratings, which can provide you with peace of mind. They also offer flexible options, such as choosing between bonds that have short or long terms or offer higher or lower interest payments.
Although you can’t expect to receive high returns from bonds, you can do your research and find bonds that are worth your while. Some bonds might adjust based on inflation, while others might pay a solid amount of interest income.
6. Invest In Rental Real Estate
Investing in rental real estate is the gold standard in retirement planning. If you are in a position to buy real estate, then act now. Not only will you secure yourself a passive income stream, but you’ll also have access to real property that will appreciate in value over time.
Depending on your local rental market, your rental income can be used to pay off your mortgage. Even better, some landlords manage to pocket leftover funds that can be put toward retirement savings or your next real estate purchase.
Eventually, a property can be refinanced to re-invest into a second rental property, and so on. You also have the flexible option to rent out a property with the plan to make it your retirement home. If you already have a home you want to retire in, then you can rent it out indefinitely as your source of retirement income. In either case, your housing in retirement is taken care of. If you’re interested, find out how to get your rental property business up and running here.
7. Keep Safe Alternatives
Retirement investments involve some level of risk, so you’ll always want to have a backup plan. The goal of a safe alternative is to pad yourself with a safety net should you fall. Experts recommend that you build up an emergency account without the focus of generating more income.
Another great use for your emergency account is to use it as your parking lot, or your think tank. Any smart investment plan takes time and thoughtfulness, and the execution shouldn’t be rushed. If you have some investment capital ready but aren’t ready to launch your investment strategy yet, then park your money into your emergency account. That way, you can let your money grow even the slightest amount while you wait.
8. Closed-End Funds
Closed-end funds are a type of investment fund that produces income on a monthly or quarterly basis. This income can come in the form of interest, dividends, or a return of the principal. These funds have different modalities, such as stocks or bonds. Other types might use leverage, by borrowing against existing securities. However, be careful. The word “leverage” always clues you into additional risk. These funds can produce a higher yield but can be volatile. Be sure to do your research before investing in closed-end funds.
Dividend funds can be a great option if you aren’t a savvy investor or don’t want to bother doing your own homework. You can get the benefits of being a stock investor without having to do research or select your own stocks.
Dividend funds are stock portfolios that are owned and managed on your behalf. You get to earn the dividends, but you’ll be charged a fee in exchange for this service. Keep in mind that dividend funds have the same benefits and pitfalls as stock investing. Your winnings or losses will rise and fall right along with the market.
10. Real Estate Investment Trusts (REITs)
Until now, we’ve discussed portfolio investing, as well as investing in real estate. What if you could create a trifecta of all three concepts? (Investing, portfolios, and real estate.)
Well, it turns out that such a concept already exists, and it’s alive and well. Real Estate Investment Trusts (REITs) operate similarly to mutual funds, except the asset in question is real estate. They remain to be one of the best retirement investments. REIT companies purchase, manage, and rent out real estate on behalf of their investors. This is an excellent way to acquire a diversified portfolio and get into the real estate investing game at the same time. If you have a certain type of real estate you’re interested in, you can find REITs that specialize in that specific sector (residential, commercial, industrial, etc.) Read more on the specifics of REIT investing, and how to get started, here.
11. The Federal Thrift Savings Plan (TSP)
A federal thrift savings plan is a lot like some of the earlier mentioned retirement investments. Often compared to 401(k) plans or IRAs, a TSP is a long-term, generally lower-risk investment type. These plans are available to federal workers and service members. When setting up the account, users will pick between five low-cost options ranging from bonds to stocks. There is also an option to select a target retirement date, which can help further guide investment decisions.
Federal workers are also eligible for an employer contribution match that roughly falls around 5 percent. Whenever there is a match involved, retirement accounts get that much more attractive. Always remember to ask your employer about the specifics and keep an eye on your account to ensure its meeting your goals for the future.
Choosing the best retirement investment strategies might feel like a daunting task, and rightfully so. It’s a lot of pressure to plan for the unknown and to find out how you’ll end up with exactly how much money you’ll need to live out your golden years. The best retirement investing advice we can provide is to break things down step by step and even work backward a little. Start by calculating how long you expect to be retired and exactly how much money you’d need annually to live comfortably. A financial advisor would be the perfect advocate to help you get started and identify the best options to help meet your goals.
Ready to start taking advantage of the current opportunities in the real estate market?
Click the banner below to take a 90-minute online training class and get started learning how to invest in today’s real estate market!
The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.
As an expert in retirement planning and investment strategies, I bring a wealth of knowledge to guide you through the key concepts presented in the article. My expertise is grounded in a comprehensive understanding of retirement planning, investment vehicles, and financial strategies. I have hands-on experience in navigating the complexities of retirement management, and I am equipped to provide valuable insights and actionable advice.
Let's delve into the concepts highlighted in the article:
Retirement Planning Strategies:
Establish A Timeline:
- The age you choose to retire serves as a crucial starting point for planning.
- Analyze investment potential with your retirement timing in mind.
Estimate Spending Needs:
- Determine your post-retirement income needs, considering factors like medical expenses and travel.
- Set realistic expectations to ensure financial preparedness.
Look At The Numbers:
- Consider potential tax implications when building a retirement portfolio.
- Examine how different investment gains are taxed.
Find A Risk Vs Return Balance:
- Assess your risk tolerance, adjusting your portfolio accordingly.
- Diversify investments to mitigate risks.
Create An Estate Plan:
- Factor estate planning into retirement considerations.
- Consider life insurance for added financial security.
Retirement Investment Options:
Contribute To Your 401K:
- Maximize contributions, especially if your employer offers a matching program.
- Be mindful of withdrawal penalties before retirement age.
Open An IRA Or A Roth IRA:
- Consider IRAs for tax-deductible contributions and tax-free growth.
- Evaluate the differences between traditional and Roth IRAs.
Open A Health Savings Account:
- Utilize Health Savings Accounts (HSAs) for tax-deductible contributions and tax-free withdrawals for healthcare expenses.
Be Aware Of Retirement Fund Fees:
- Investigate and minimize fees associated with retirement funds.
- Ensure fees contribute to the value of the investment.
Buy A Fixed Annuity:
- Hedge against outliving savings by investing in fixed annuities.
- Secure a set income for a specified period.
Utilize Saver’s Credit:
- Take advantage of tax credits based on IRA or 401(k) contributions.
- Maximize personal contributions for higher credits.
Delay Social Security Benefit Collection:
- Consider delaying Social Security to increase annual payments.
- Strategize with a spouse for optimal benefits.
Prepare For Inflation:
- Account for inflation in retirement savings calculations.
- Ensure investment strategies consider the impact of inflation.
Assess Risk Tolerance:
- Tailor investment strategies to align with personal risk tolerance.
- Distinguish between high-risk and low-risk investment options.
Create A Withdrawal Strategy:
- Develop a withdrawal strategy at least 5 years before retirement.
- Consult with a financial advisor to optimize the withdrawal plan.
Top 10 Retirement Investing Strategies:
Create A Total Return Portfolio:
- Focus on a balanced mix of investments to mitigate risk.
- Aim for a predetermined withdrawal rate for stability.
Utilize Retirement Income Funds:
- Invest in funds that automatically distribute income.
- Retain control over principal while receiving monthly payouts.
Use Immediate Annuities:
- Guarantee lifetime income with lump-sum payments.
- Ideal for those seeking certainty in retirement income.
Utilize Variable Annuities:
- Invest in portfolios with gains and losses.
- Consider additional protection plans through riders.
- Secure steady income through government or corporate bonds.
- Choose bonds with flexible terms and interest payment options.
Invest In Rental Real Estate:
- Acquire real estate for a passive income stream.
- Explore refinancing options for further investments.
Keep Safe Alternatives:
- Build an emergency account for backup.
- Use the account for thoughtful investment planning.
- Invest in funds providing regular income.
- Be cautious of additional risks associated with leverage.
- Access stock market benefits without personal stock selection.
- Be aware of market fluctuations affecting dividends.
Real Estate Investment Trusts (REITs):
- Invest in diversified real estate portfolios.
- Tailor investments based on specific real estate sectors.
The Federal Thrift Savings Plan (TSP):
- Comparable to 401(k) plans, available for federal workers and service members.
- Choose from low-cost investment options and benefit from employer contributions.
In summary, the key to successful retirement planning lies in a thoughtful and diversified approach, considering individual goals, risk tolerance, and financial dynamics. By incorporating these strategies and options, individuals can optimize their retirement savings and create a secure financial future.