Your golden years are coming! You may have left 40 years before your retirement or only 15 years, but we’ll all end up there sometime. Retirement itself may be inevitable, but the type of retirement we enter into can vary widely depending on a few key factors. These factors include:
- Social Security
- How much do we have in savings and investments
- Health care
- How big our family is
These are some of the larger considerations that determine how comfortable our retirement can be.
Since our whole lives are different, there is no best strategy for retirement investments that is suitable for everyone. Developing a retirement investment strategy that will result in a comfortable retirement that you want takes a little time and research, but it’s worth the effort.
How to Develop a Retirement Investment Strategy
When it comes to investments, you need to find the types of investments, the schedule, and the amount of money that will give you the retirement you want.
Take some time to figure out the overall vision of retirement yourself. You don’t have to predict every detail of the future, but if you know what you want, you can develop a strategy.
- Where you want to live, taxes and living expenses
- How often, if any, do you travel?
- If you have children and help them with things like financing their studies or buying a house
- If you bring money in retirement (through a part-time job)
- Your housing: will you downsize or upgrade? Are you going to split time between states?
- At what age will you retire and how long do you think you will retire
These considerations give you an overview of your annual cost of living in retirement. Multiply that number by the time you think you are retired and you will get a number for how much you may need to retire. From there, you can think about the types of investments that will bring you to that number.
For example, if you are currently in the city or in an area where you are retiring, renting property can currently be a great investment. You know that you are in the area to manage the property and you can buy long term. If you know that you will be moving within a few years, rental properties may not make so much sense in your current market.
Types of investments
There are five types of investments that you can make to create a retirement investment strategy. Money invested for retirement should be viewed as a long-term investment.
The money you invest when you are 20 years old is money that you will ideally not use for another 40 years. During this time, it grows on the market. Historically, the stock market has returned an average of 10% a year. This includes the ups and downs of times like the Great Recession. The sooner you can invest, the more time it has to survive the lows and grow during the highs. Don’t try to time the market. Instead, choose the time in the the market.
There are many options on the stock exchange. You can buy individual stocks, mutual funds, index funds, dividend funds, blue chip stocks and more. Which works best depends on how far you are from retirement, what fees are charged and where you invest.
Before you buy stocks, read our guide to investing in stocks. Make sure you understand what you’re buying and how it goes into your long-term plan.
Bonds are one way of lending money to a separate company. Municipal bonds are, for example, loans that you give to a city or town. Bonds tend to be less volatile than stocks and can have much lower yields. However, the rate of return is constant as bonds are delivered at a fixed rate that you receive throughout the life of the bond. Bonds are a more reliable income when it comes to old-age provision.
Bond interest rates fluctuate as the Federal Reserve changes rates. So keep an eye on this.
Another option that comes in many forms is pensions. Annuities are often grouped into investments, but are actually a form of insurance. With immediate pensions, for example, you pay the insurer a lump sum in cash and receive regular monthly payments when retired.
With a variable pension, your money is invested in a portfolio of your design. To get the same guaranteed return, you can add what is called “driver“Or a payment guarantee. Drivers come with additional fees and each has its own formula for calculating your payments. Annuities are often an expensive option for your retirement portfolio, and as such, many people ignore them. However, many other people like them to secure monthly retirement payments.
4. Real estate
We all need a place to live, and real estate investors rely on this to make money. Collecting a rental check-in retirement is attractive to many people. Real estate investments can be very lucrative, but are also associated with generally higher upfront costs and ongoing maintenance costs for do-it-yourself work, property taxes and mortgages. Rental properties are best suited for people who have some manual skills or have the money to hire people to repair or manage the property.
It is recommended by almost every single financial advisor to keep some cash in cash, especially when you are nearing retirement (find the good ones when Paladin invests). Cash is king, and when it comes to an emergency, you can’t beat it. How much money you want to keep depends mainly on your risk tolerance. Those who value more stability may want to keep their living expenses in cash for up to a year. Those who are more risk tolerant will be able to cope well with four months of living in cash.
These are just a few options for retirement investments, but they are the main ways to build a diversified investment portfolio.
Your best age portfolio
The best retirement savings portfolio is probably a mix of the above investment options and can use these free planning tools. No single investment is permanently secure, so diversification is an advantage for you. And as you approach retirement, some types of investments may become more appropriate than others.
Start with what you imagine in retirement and build an investment portfolio that you feel comfortable with.
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