Everyone should know by now that you need to prepare for retirement. But what people don’t always know is how to go about planning for retirement, and what the best retirement investment strategies might be. Whether you’re just starting out in your 20s or reaching the pinnacle of your career, you should start investing for retirement right away. In this article, we’ll walk you through the top strategies for retirement planning. Then, we’ll reveal the top tips on how to invest your retirement savings. You’ll learn not just how to save for retirement, but then put those savings to work so that they grow while you sleep.
Top 10 Investment Strategies For Retirement Planning
- Contribute To Your 401K Consider yourself lucky if you have an employer who sponsors a 401(k) plan. Consider yourself even more lucky if they offer 401(k) matching. According to Investopedia, a 401(k) is a tax-advantaged retirement account sponsored by employers. As an employee, you make contributions through automatic payroll deduction. This has the added benefit of lowering your taxable income. Do your best to contribute as much of your paycheck as you can, especially if there is a minimum to qualify for employer matching. The IRS states that the contribution limit in 2020 is $19,500. Employees over the age of 50 are allowed to make additional catch-up contributions of $6,500. One thing to be careful of is to ensure you don’t touch these accounts until you reach retirement age. Otherwise, you will be heavily taxed if you make a premature withdrawal.
- Open An IRA Or A Roth IRA If your employer doesn’t offer a 401(k), then don’t worry, there are other options. An IRA, or an individual retirement account, holds similar benefits to a 401(k). It offers tax-deductible contributions and tax-free growth. The only real downside is that you have to open up and maintain the IRA yourself through a private financial entity, like a bank or brokerage. If you’re concerned about making tax-free withdrawals during retirement, then consider a Roth IRA. The Roth IRA differs from a traditional IRA in that you make after-tax contributions. Once you’ve made your contributions, your money actually grows tax-free. With a traditional IRA, your earnings don’t get taxed while you hold the account, but you will get taxed later on when you’re making withdrawals. Both options offer advantages and disadvantages, with neither being superior. It’s a matter of selecting the option that best fits your retirement goals.
- Open A Health Savings Account The harsh reality is that your health expenses likely will increase significantly in your golden years. In fact, Fidelity Investments estimates that a couple in their mid-60’s retiring today could pay $285,000 in healthcare and medical expenses during retirement. Keeping this large sum in mind, preparing as early as possible is necessary. Health Savings Accounts (HSAs) are a great way to start preparing ahead of time. These accounts are similar to 401(k)s but are intended to pay for healthcare expenses. Contributions are tax-deductible, any growth is tax-free, and withdrawals are tax-free if they are spent on qualifying healthcare expenses.
- Be Aware Of Retirement Fund Fees When researching what type of retirement investment strategy you’d like to follow, be sure to double-check the fine print and find out what fees you’ll be charged. For example, mutual funds charge portfolio-management fees. Do your research and identify options that charge the lowest fees possible. If fees are unavoidable, then make sure your money is going toward a product of value. You don’t want these fees to add up and start eating away at your bottom line.
- Buy A Fixed Annuity The idea of outliving your savings during retirement is a scary concept. Another scary scenario to think about is your retirement investments performing poorly. What you can do to hedge and protect yourself against these outcomes is to invest in an annuity. A fixed annuity is an insurance product that will provide you with a set income for a certain amount of time. The timeline of when you begin to receive benefits, and for how long, are dependent on what type of fixed annuity you buy.
- Utilize Saver’s Credit If some type of tax credit is available to you, then always take advantage of it. Based on your adjusted gross income (AGI), your IRA or 401(k) contributions can get you qualified for a tax credit. These are credits that can help you save significantly in your income taxes each year. You can receive up to $1,000 if you are filing alone, and $2,000 if you are married and filing jointly. The credits you receive are based on your personal contributions, so it’s an incentive to start putting more towards your retirement plan.
- Delay Social Security Benefit Collection Some savvy retirees will delay their collection of social security benefits. The full retirement age (FRA) under the social security plan is currently 66. Did you know that the longer you wait, the more you can collect? For example, a retiree who waited until the age of 70 could potentially increase their annual payments by 8 percent. Another tip is to be strategic with your partner if you’re married. If you have a substantial difference in income, it would be wise to wait to start collecting. This way, you can collect the benefits under the higher earner in the couple.
- Prepare For Inflation It’s great if you are tucking savings away for retirement and letting those savings grow. However, have you stopped and thought about whether that growth will be enough to beat out inflation? On average, the inflation rate has been roughly 3 percent. That means that any amount of money today will be that much less valuable in the future. Whatever you’ve calculated as your retirement savings goal will be less valuable in the future because of inflation. In other words, it might not be enough. Whatever investment retirement strategy you put together might be, be sure to account for inflation.
- Assess Risk Tolerance When considering different retirement investment strategies, make sure to take your risk tolerance into account. Some types of investments might offer higher returns but are often associated with higher levels of risk. Not all investments are created equal, so you’ll want to make sure that you feel comfortable with the portfolio you create. Be sure to check out this article on different long-term investment strategies, where we discuss many different strategies with an assessment of risk levels for each.
- LAST TIP! Create A Withdrawal Strategy
You’ve saved up a nest egg for retirement – great! However, have you thought about how much, and how often, you’ll be withdrawing from your retirement accounts? Will you be slammed with penalties with each withdrawal?
A withdrawal strategy is an important but often forgotten aspect of saving for retirement. Although it might be a problem for tomorrow, you may regret not considering this aspect. When you’re actually retired and depending on your retirement income and nothing else, fees, taxes, and penalties could sting that much more.
Experts recommend creating your withdrawal strategy at least 5 years before you retire. This is something you should definitely address with a financial advisor.
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