How To Invest For Retirement (2024)

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You’ve heard it over and over again: Start saving for retirement as soon as possible. But how exactly do you do that?

Here are seven strategies to get you started on your retirement investing journey—including pitfalls to watch out for and links to help you learn more about each approach.



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1. Invest for Retirement in Tax-Advantaged Accounts

Not all investment accounts are created equal. Online brokerage accountsoffer flexibility but no tax savings when you invest for retirement. Meanwhile, tax-advantaged retirement accounts, like 401(k)sand individual retirement accounts (IRAs), provide tax-deferred or tax-free growth, making them ideal tools to invest for retirement.

IRAs and 401(k)s are available in “traditional” and “Roth” flavors. Traditional accounts may let you deduct your contributions from your taxes now, deferring income taxes to when you make withdrawals in retirement.

Roth accounts let you invest for retirement with money that you’ve already paid taxes—similar to online brokerage accounts. The difference is that when you withdraw money from Roth accounts in retirement, it’s tax free. That’s a huge advantage, but there are additional rules to be aware of with Roth accounts.

Both 401(k)sand IRAshave annual contribution limits, but over your working life, they can help you save hundreds of thousands of tax-advantaged dollars for retirement.

2. Understand Asset Allocation to Invest for Retirement

Asset allocation is a strategy that helps you choose how much money to put in stocks, bonds and cash when you invest for retirement. Simply put, asset allocation is nothing more than striking a balance among these three core asset classes.

If you’re okay with a slightly hands-on approach but prefer to keep things easy, invest for retirement with a simple asset allocation model. A two- or three-fund portfolio based on mutual fundsand exchange-traded funds (ETFs) makes it very easy to invest and save for retirement.

One fund targets growth, like an S&P 500 index fund or an international stock index fund. The second fund, like a total bond market fund, generates stable income. Diversify further with a third broad-market ETF or index fund. Asset allocation with only two or three funds still provides diversification, and it keeps you from having to pick and choose tons of stocks or bonds yourself.

Next, decide what percentage of your portfolio balance is invested in these two or three stock and bond funds. Your decision depends on your age and how well you tolerate risk. Investment management firm T. Rowe Pricesuggests the following simple allocation based on your age:

20s & 30s:90% to 100% stocks, zero to 10% bonds

40s:80% to 100% stocks, zero to 20% bonds

50s:65% to 85% stocks, 15% to 35% bonds

60s:45% to 65% stocks, 30% to 50% bonds, zero to 10% cash/cash-equivalents

70+:30% to 50% stocks, 40% to 60% bonds, zero to 20% cash/cash-equivalents

You need to check up on your simple asset allocation portfolio occasionally to make sure the market hasn’t shifted your percentage allocation away from your target mix.

And as you age, you’ll need to rebalance to keep your portfolio in line with your desired risk tolerance. You can see this in the asset allocations above, which become more conservative—with more fixed-income, bond investments—as you get closer to retirement.

3. Try Robo-Advisors or Target Date Funds for Easy Management

If you want the benefits of the simple asset allocation strategy described above but none of the upkeep, invest for retirement with a robo-advisoror a target date fund. Robo-advisors and target date funds charge extra fees, but in exchange they automatically rebalance your portfolio as you age and markets change.

Robo-advisors generally charge an annual fee of 0.25% to 0.50% of the assets they manage for you. Target date funds change expense ratios that are slightly higher than what you’d pay if you chose similar index funds on your own. Remember, slightly higher fees may seem like a small price to pay in the short term, but over decades they really add up.An additional 0.25% fee over 30 years can cost you tens of thousands of dollars over the life of your investment.



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4. Invest for Retirement in Dividend-Paying Stocks

Some investors prefer to get steady, consistent income from dividend-paying stocks. While historically the stock market has provided strong average returns, it hasn’t always followed a straight, predictable line upwards. The S&P 500 has seen average annual returns of about 10% for instance, punctuated by some major declines.

Some stock investors feel more comfortable locking in their profits as soon as they can. Dividend investingaims to build a portfolio to stocks that offer consistent, high dividend payments.

Companies that pay dividends are providing you with a steady share of their profits, in the form of monthly, quarterly, or annual payments. These dividend payouts can be cash or additional stock. Dividends aren’t guaranteed, but they tend to be sustained over long periods, because missing dividend payments can be interpreted as a sign that a company is in bad financial health.

You should probably avoid devoting your entire retirement portfolio balance to dividend stocks. Because the companies that pay dividends tend to be more established, they may not offer the same exponential growth in share prices as newer, smaller companies. It is, after all, easier to double your share value when it’s only $20 instead of $2,000.

5. Buy Rental Property to Invest for Retirement

Like dividends, real estate is often thought of as a way to provide consistent income regardless of market performance. While you can also invest for retirement with real estate, keep in mind that real estate investing is not for everyone.

Though rentals can provide regular cash flow, you also face expenses associated with maintaining your investment properties. That means you’ll need to earn enough from rent to cover your mortgage anddamages and repairs. You can minimize some of the more onerous aspects of real estate investing by hiring a management company, but that also decreases the overall returns you’ll earn.

If you’d like the benefits of investing in real estate with less of the hassle, consider buying share of a real estate investment trust (REIT). REITs are groups of income-generating real estate properties that historically have paid higher dividends than stocks and even bonds.

6. Invest for Retirement in Annuities

Annuitiesare insurance contracts that provide consistent, long-term income payments. Some people choose annuities when they invest for retirement for safety and security. And annuities are widely advertised as a safe way to provide regular paychecks in retirement.

There are a very wide variety of different annuities out there, however, and there’s a lot to learn about these products. Job number one is to watch out for high costs. Some annuities can involve complicated phrasings and difficult-to-understand or hidden fees.

At first glance, annuities appear to work a lot like other investments. You buy a policy and then receive back the money you paid—and then some. They’re often compared to bonds or certificates of deposit (CDs), but with higher returns. Some annuities even allow you to purchase stocks in them and benefit from stock market growth with what seems to be less risk.

There are three main types of annuity contracts. Many retirement experts recommend you stick with fixed annuities. They offer guaranteed repayments of your purchase price plus a modest return, and lower fees than other types. Comparison shopping is also much easier with fixed annuities because their language and structures tend to be clearer.

The other two main types are variable annuities and index annuities. Variable annuities offer no guaranteed payments, are confusingly written, and may actually cause you to lose some of the money you paid if the investments in the annuity perform poorly.

Index annuities, also called fixed index annuities, are like a hybrid of fixed and variable annuities. They offer reduced investment growth compared to variable annuities but do come with some protection against market downturns. When you sign up for an index annuity, you will be told the maximum you can gain or lose from it in a given year.

7. How QLACs Can Help You Invest for Retirement

Many retirement investors worry about outliving their retirement savings. A qualified longevity annuity contract (QLAC) is an annuity contract designed specifically to ensure you get regular income payments in the later stages of life.

Normally, you have to start taking withdrawals from tax-advantaged retirement accounts when you turn 72. These payments are called required minimum distributions (RMDs). QLACs help you extend RMD deadlines to age 85. In addition to ensuring the longevity of your retirement investments, this delay can also help decrease your tax liability and keep your medicare premiums lower.

In 2020, you’re allowed to use the lesser of 25% of your retirement account or $135,000 to buy a QLAC that pays out indefinitely. While QLACs can be beneficial because of the certainty of income they provide, they can also be risky. You may not live to see all of your retirement money used, and you essentially lock yourself out of accessing a portion of your retirement funds in exchange for their guaranteed payments.

As you plan your retirement, be sure to talk with a financial advisor who can help you make the most of your retirement investing scheme.

As an expert in personal finance and retirement planning, I have a deep understanding of the concepts discussed in the article. My knowledge is based on both academic expertise and practical experience, having advised individuals on retirement strategies for many years.

Now, let's delve into the key concepts presented in the article:

1. Invest for Retirement in Tax-Advantaged Accounts

  • Explanation: The article emphasizes the importance of using tax-advantaged retirement accounts, such as 401(k)s and IRAs. These accounts provide tax-deferred or tax-free growth, making them ideal for long-term retirement savings.
  • Expert Insight: I can attest to the significant tax advantages offered by these accounts, such as deductible contributions in traditional IRAs and tax-free withdrawals in Roth IRAs.

2. Understand Asset Allocation to Invest for Retirement

  • Explanation: Asset allocation involves distributing investments across different asset classes like stocks, bonds, and cash. The article provides age-based allocation recommendations to manage risk and returns.
  • Expert Insight: I endorse the importance of strategic asset allocation, as it helps balance risk and return, aligning with an individual's risk tolerance and investment goals.

3. Try Robo-Advisors or Target Date Funds for Easy Management

  • Explanation: Robo-advisors and target date funds automate portfolio management, providing an easy way to follow a diversified investment strategy without constant manual adjustments.
  • Expert Insight: While these tools simplify investing, it's crucial to consider the additional fees associated with robo-advisors and target date funds, as highlighted in the article.

4. Invest for Retirement in Dividend-Paying Stocks

  • Explanation: Dividend investing involves building a portfolio with stocks that provide consistent, high dividend payments, offering a source of regular income during retirement.
  • Expert Insight: I acknowledge the benefits of dividend-paying stocks for income, but caution against over-reliance on them, given the potential limitations in growth compared to other equity investments.

5. Buy Rental Property to Invest for Retirement

  • Explanation: Real estate, specifically rental properties, can offer consistent income, but the article advises on the challenges associated with property management.
  • Expert Insight: I support the idea of diversification through real estate but stress the importance of thorough research and understanding the responsibilities involved in property ownership.

6. Invest for Retirement in Annuities

  • Explanation: Annuities are insurance contracts that provide consistent, long-term income payments. The article outlines the different types of annuities, their risks, and benefits.
  • Expert Insight: I caution readers about the complexity and potential high costs associated with certain annuities, recommending a focus on fixed annuities for more straightforward terms and lower fees.

7. How QLACs Can Help You Invest for Retirement

  • Explanation: Qualified Longevity Annuity Contracts (QLACs) help address the concern of outliving retirement savings by providing regular income payments in later life.
  • Expert Insight: While acknowledging the benefits, I emphasize the potential risks, such as not fully utilizing retirement funds and limited access to a portion of savings.

In conclusion, following the strategies outlined in the article requires a thoughtful approach tailored to individual financial goals and risk tolerance. It's crucial for individuals to seek guidance from a financial advisor to ensure a well-rounded retirement investment plan.

How To Invest For Retirement (2024)
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