Many of us dream of a relaxing retirement for our golden years. It’s nice to think about having fewer day-to-day responsibilities and more time to pursue our interests as we age. So how can we plan for that? The best way to plan for a secure retirement is to make informed investment decisions now that will help you build your savings and reach your financial goals.
Investing can feel a little overwhelming, particularly if you’re someone who hasn’t done it before or doesn’t follow investment and stock market news. If that sounds familiar, here are 9 smart investment tips for retirement to help you manage your risk, earn money, and create an investment strategy that will get you the desired results.
Investing for retirement isn’t a simple endeavor. Every investor must have the information necessary to make intelligent investment decisions now for a secure future. We’ll go into these things in more detail in the next section, but here are some of the most important factors to remember as you create an investment plan.
These things are all part of retirement planning and may impact your financial goals and plans now and after retirement.
Here are our best tips to help you set a financial goal for a secure retirement.
The first tip is to think about when you want to retire. Knowing how many years you’ll have to save and invest before your planned retirement is essential. Someone who’s 21 and has just graduated from college may have a 49-year investment horizon if they plan to work until they’re 70 or a 29-year horizon if they want to retire at 50.
Your investment horizon plays an essential role in retirement planning. It will help you decide how aggressive to be with your investments, which assets to buy… and when. You can change your mind; if that happens, you will likely need to revisit your investment strategy.
It’s crucial to know your annual expenses in retirement. Although you cannot know for sure, estimating is the best way to determine how much money you’ll need to save.
Some factors to consider include where and how you want to live: will you sell your home and downsize? Will you live abroad?
You’ll also want to consider how you’ll spend your time in retirement. You may want to continue working part-time or monetize your favorite hobby. You may want to travel or take college classes. Whatever your plans are, you’ll need to consider them when you calculate your expenses.
There are several methods to use to calculate your expenses. One popular option is to multiply your current expenses by 80%. To calculate the total amount you need to save, multiply that by the years you expect to live after retirement.
Inflation has made paying our regular living expenses more complicated than it used to be. Here are some ways to build inflation into your retirement planning:
There’s no way to know what will happen with inflation in the future, but you can protect yourself with these tips.
Taxes are a necessary consideration when planning for retirement. Traditional 401(k) accounts and traditional IRAs allow investors to make contributions on a pre-tax basis, something that reduces your tax burden now. The flip side is that you must pay taxes on your withdrawals.
An alternative is to choose a Roth 401(k) or IRA, where you’ll make post-tax contributions. The benefit is that you won’t need to pay taxes on your contributions or withdrawals once you’ve retired. If you expect to be in a lower tax bracket in retirement than you are now, it may be beneficial to defer taxes.
Your risk tolerance will determine what types of investments you make. People with a high-risk tolerance may invest a high percentage of their savings in stocks and up-and-coming industries. In contrast, those with a low-risk tolerance may choose stocks more conservatively and include a higher rate of investments that aren’t volatile in their portfolios.
Some high-risk investments include cryptocurrency, high-yield bonds, REITs (Real Estate Investment Trust), and venture capital. Low-risk investments include dividend stocks, preferred stocks, mutual funds, short-term certificates, Treasury bills, notes, bonds, and TIPS.
You may be wondering how diversification can strengthen your retirement portfolio. It’s simple: diversifying your portfolio is the best way to make sure you don’t have too much of your money in any one asset or asset class. A commonly accepted rule of thumb is to calculate what percentage of stock to have in your portfolio by subtracting your current age from 100 (or 110 to allow for a longer life span.)
Ideally, your portfolio should include a mix of high-risk, medium-risk, and low-risk investments in various classes. For example, you might want a mix of stocks that include growth stocks, dividend stocks, and IPOs. You could add real estate to the mix by buying property or by investing in a REIT. Having a small percentage of cryptocurrency could be advantageous, and you might invest in a mutual fund and other low-risk investments to create security.
It’s important to remember that your portfolio’s balance may change over time. As a rule, you should plan on reviewing any asset or stock that’s responsible for 5% or more of your total holdings. In some cases, these may be worth holding onto for a while, but anything over 10% needs immediate attention.
For example, if you have 10% of one stock, the best thing to do is to sell some of it and reinvest in something else. It may be a different stock and you should check your asset allocation among sectors, too. We suggest reviewing your asset allocation once per quarter to make sure you’re not over-exposed.
Exchange-traded funds (ETFs) offer investors a stock market investment option without the big risks that may be associated with investing in an individual stock. An ETF is designed to mirror the performance of an index, such as the S&P 500 or the NASDAQ 100.
You may also invest in mutual index funds, which include all stocks, a mixture of stocks and bonds, or a unique mix determined by the fund. Remember that ETFs may be traded throughout the day, while mutual index funds may be traded only at the end of the day.
There’s no shortage of DIY investment choices, including robo advisors and investment apps. That said, many investors may prefer to work with a human advisor who can help them make sense of their investment options and take care of important tasks such as rebalancing a portfolio. That’s part of the reason that Leaders Credit Union has partnered with LPL Financial to offer financial guidance to our members. (We should note here that the NCUA insures credit union deposits, but balances in investment accounts are not insured, which is something that’s true with banks as well.)
Working with a financial professional can help you create a workable retirement plan and get a handle on your personal finance goals. We suggest looking for a fiduciary advisor or a firm that operates on fiduciary principles that require them always to act in the best financial interest of their clients. We recommend asking about fees to make sure that you’re comfortable with what you’ll be paying.
We want everybody to have the tools to plan for a secure retirement, where they can enjoy the fruits of their labor and relax. The 9 investment tips that we’ve included here will point you in the right direction and help you reach your most important financial goals. If you’re looking for additional ideas for your investments, you can also download our Deep Dive into Investments.
Do you need professional guidance to choose an investment strategy and do what’s needed to have a secure retirement? Leaders Credit Union is here to help! Schedule an appointment with one of our LPL Financial Professionals today.