There are many ways to save for retirement. When choosing how to save, you want your retirement savings to be secure and yield a maximum return on your money, In addition to simple savings and individual retirement accounts (IRAs) that have a fixed interest rate, you should include a retirement investment strategy as well.
Retirement savings vehicles such as savings accounts, IRAs, and certificates of deposit (CDs) are useful because they allow you to set aside money in a safe place where it will earn interest, but they typically earn only a few percent per year. To get a bigger return on your retirement savings, you need to invest it in stocks, bonds, and mutual funds that are likely to yield a higher return. Granted, investments have a higher risk but, historically, you get a much higher return on investment when you have a well-balanced portfolio.
Understand Different Types of Retirement Investments
When developing a retirement investment strategy, you need to think long-term. Retirement investing is a marathon, not a sprint, so you will want to consider how best to earn greater returns over time rather than focusing on short-term profits.
There are different ways to approach investing. Many people invest for immediate profits, looking for bargain stocks that yield fast returns or trying to pick the next rising stock. Platforms such as Robin Hood, TD Ameritrade, and E*TRADE have made it easy for individuals to chase hot stocks—such as GameStop—but that type of investing is high risk. Others work with their stockbroker to develop more conservative investment portfolios, investing for short-term wealth accumulation to buy a home or for some other purpose.
Retirement investing is different. Instead of thinking in terms of days, weeks, or months, you are investing for years, looking for investments that promise to yield greater returns over time. A balanced stock portfolio with 60% stocks and 40% bonds earned an average of 9% each year going back to the 1920s. Even with the dips in the stock market, investors with a 60/40 portfolio saw average returns of 12% each year for five years following each market drop in 1974, 2002, and 2009.
You want to consider all the savings vehicles available to save on taxes as well as earn interest for retirement. Take advantage of your 401(k) plan at work, especially if your employer matches your retirement contributions. When the time comes to change jobs be sure to roll over your 401(k) into an IRA or some other tax-deferred retirement account so you aren’t liable for taxes. You can even roll it into your retirement investments.
Create the Right Retirement Investment Strategy
When developing a retirement plan, you want to consider the best way to earn interest and accumulate wealth while minimizing taxes.
Start by contributing the maximum amount to an IRA or Roth IRA each year. An IRA gives you a chance to save tax-deferred income. The money invested in an IRA is before taxes, so you can reduce your taxable income and pay income taxes when you make IRA withdrawals. If you expect your income to be lower when you retire, it might make sense to prepay the income tax by taking out a Roth IRA so you will save on taxes. You can use an IRA as part of your retirement investment strategy.
Be sure to include investments in your retirement strategy since the stock market has always outperformed savings interest rates. The stock market will fluctuate up and down from year to year, but the stock market is up more years than it’s down. Over 40 of the last 50 years, the S&P 500 has had an average annual return of 10.9%.
Your retirement investment portfolio will change over time as will your taste for risk. Investing in higher-risk stocks that promise greater returns is more appealing to younger investors. As you get older, you will want to be more conservative when it comes to risking your nest egg.
You also want to make sure that your retirement income lasts as long as possible, so it pays to have a retirement savings withdrawal strategy. The rule of thumb is that you should plan to live on 80% of your current annual costs because you will be claiming Social Security and won’t be contributing to your retirement fund after age 65.
You should calculate your expenses based on planned retirement income and expenses. When it comes time to tapping your retirement investments and savings, you can use the 4% rule to estimate your withdrawals; use 4% of your retirement savings each year for living expenses. Be sure to consider minimum distribution requirements when planning your retirement spending.
Get Advice from the iQCU Experts
Developing a retirement plan, especially a retirement investment strategy, is something you shouldn’t tackle on your own. Find an investment advisor you trust who specializes in retirement planning, such as one of the financial experts at the iQ Investment and Retirement Services Center.
iQ Credit Union’s mission is to help members achieve their financial goals at every stage of their lives, including retirement. Our financial experts can help you achieve your goals and adjust your investment strategy to meet your changing needs. They also can help you take advantage of financial tools such as IRAs, CDs, money market accounts, savings, and even iQ’s Easy Saver plan to help build your savings.
Contact the professionals at iQCU to get started on your retirement investment strategy.