We all know we need to save for retirement. And for some, that’s hard. But figuring out how to invest for retirement can be even harder for others. Investing requires a certain amount of expertise and a way of thinking about money that’s not innate for most people. Plus, how you think about investing will definitely change as you get older.
How to invest for retirement can be a tough question to answer, but hopefully the information below will help you feel more prepared and at ease when life throws its unexpected twists.
Here are seven easy tips to help you invest your retirement funds successfully.
1. Set goals
Setting goals almost always leads to better results, and retirement investing is no exception.
When deciding how to invest your money, you should consider the following:
- Do you want to earn a specific rate of return?
- Are you trying to guarantee that return?
- Is it important to you to protect the original amount you invested, or would you be okay with losing some of your money?
- What is your investment horizon? Will the money be invested for one year or 50 years?
- Are you planning to withdraw money from your account? How will a withdrawal affect your other goals?
When considering investing, you need to have a plan. “You need to be aware of your strategy to either get rich or stay rich,” says Christopher Girbes-Pierce, founder and CEO of Enlightened Wealth Management, LLC.
This means you need to evaluate where you are in life. While you’re working, you’re building wealth by working or owning a business, but when you reach retirement age, it’s all about diversifying your investments to preserve your wealth, explains Gervais-Pierce.
2. Align your investments with your goals (set a target asset allocation)
Your financial goals will determine your target asset allocation, which is how you allocate (invest) your assets (money) across different types of financial instruments.
In addition to your goals, the ideal asset allocation also includes your risk tolerance and the time frame before you need the money.
Your target asset allocation may include different percentages of the following types of assets:
- stock: Stocks involve risk. Investing in stocks can put your initial investment at risk. However, stocks can offer the highest rate of return.
- Mutual funds: A mutual fund is a single investment in many different companies and investment types. Mutual funds are considered to be less risky than stocks, yet offer a higher rate of return.
- Bonds: Bonds can offer a guaranteed return, making them attractive when you need or want safety.
- pension: Annuities provide a guaranteed income, and in most cases you know exactly what your annuity will yield, but annuities are more of an insurance product than an investment.
- cash: Cash is, in some ways, the lowest-risk investment, but its value can decrease over time due to inflation. Although cash is stable, it is not without its major drawbacks.
3. Diversification
Investing is like everything else in life, we want it all now and most people want to get the most out of their investments while minimizing risk.
Diversifying your portfolio is a good way to get closer to that achievable goal.
Diversification is the practice of investing some of your money in one way and the rest in another way to protect yourself against risk and create growth potential at the same time. Diversification can be defined as not putting all your eggs in one basket. By spreading out your investments, you reduce the chances of losing money.
Diversification refers to investing across different asset classes, and can also refer to diversifying within those classes.
4. Keep costs low
Once you’ve decided to diversify your retirement investments, it’s important to avoid investments with higher costs, such as certain types of annuities and actively managed mutual funds, says Gervase-Pierce.
“The cost of managing a high-maintenance portfolio for just one year can eat into the entire portfolio,” says Gervais-Pierce.
This also applies to investments in taxable accounts: If you haven’t reached the IRA limit and you have real estate investments, for example, Girbes-Pierce recommends keeping the money in an IRA, so you don’t have to pay taxes on it like you would if you put the investment in a taxable account.
If you don’t know how much you’re paying in investment fees, find out.
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5. Be careful with your access to money
Another thing to keep in mind when thinking about how to invest for retirement is how much access you have to your funds.
“You may find yourself in a situation where you want to go on a big holiday and need to withdraw some funds from your pension, but you’ll be penalized if you do,” says Gervais-Pierce.
Many people don’t know about these fees when they sign the paperwork, so be sure to get answers before agreeing to anything. You have the right to know how much of your funds you can access at any time without penalty, cautions Gervase-Pierce.
6. Balance Adjustments
As mentioned in tip #1, it is very important to establish an asset allocation strategy that suits your investment goals and how you will achieve them.
It’s also important to monitor your account and rebalance your investments if your desired asset allocation percentage becomes imbalanced.
Rebalancing is the process of selling some assets and buying others in order to realign your overall investment portfolio to your desired ratios, or desired asset allocation.
Learn more about rebalancing here.
7. Know when to change your asset allocation strategy
In some cases, you may need to change your target asset allocation and adjust your investment amounts or expected rates of return.
Why? Your goals may change, your risk tolerance may shift, but the most common reason for updating your target asset allocation is age.
As you get older, it’s often recommended to move riskier investments to more conservative options. Learn more about optimal asset allocations for different age groups. Or explore a sample asset allocation. The bucket strategy is another approach to asset allocation.
The NewRetirement Planner allows you to model future rate of return changes for each of your investment accounts, giving you a better idea of your future wealth and security if you plan to reduce (or increase) your investment risk.
