Retirement investing is such an important part of your plans for the last life event that you have to prepare for. Your retirement is the time in your life when you give up your career, hang up your work boots and enjoy the fruits of your labor entirely. You rely on the savings that you put aside for the past decades of your work life and the benefits that you will receive from the government through your Social Security.
But what exactly will life be like when you retire? You have to understand that any preparation that you make today will not have the same value in the future because of the inflation and the various changes that could happen in the economy.
Current retirement statistics
Based on the retirement statistics presented on Bankrate.com, $1 million for retirees back in 1980s will last them more than 30 years. Fast track to 2013, the same amount of money will only last retirees 25 years – and that is still a rough projection. While that is true, projected inflation rates have gone down for the past decades. The value of your retirement investing is greatly impacted by the inflation rate so you need to pay attention to this. Back in the 60’s and 70’s, the rate was as high as 5%. In the 80’s that went down to an average of 3.5%. At present, the inflation rate averages at 2.5%. Not so bad for present retirees but what exactly are they going through right now?
Last January of 2013, Zerohedge.com released an infographic on retirement statistics that showed a frightening picture about the baby boomers – the generation that started to this year. According to statistics, 40% of baby boomers are not planning to retire at all! They are going to work “until they drop” to be able to finance their basic needs – and most likely a couple of debts too. Overall, the infographic shows that 46% of Americans only have less than $10,000 put aside for their retirement – a relatively dismal figure compared to the $1 million mark that Bankrate mentions will only last 25 years. To top off this frightening statistic, 36% of Americans are not even contributing to their retirement fund at all!
With the still shaky economy and the looming financial issues that have yet to be solved (e.g. debt ceiling), retirement investing has to be taken a lot more seriously by consumers. It is not something that you should leave to chance. Apparently, it is never enough that you put money aside for your savings. You need to invest it so the growth of your money can keep pace or be even higher than the current inflation rate.
Having said that, here are the three important rules that you need to follow when investing for your retirement.
Rule 1: Understand when and where to invest
All of the tips about retirement investing will mean nothing if you fail to understand what this is all about. Among the important questions that you need to answer is where to invest your money. You should not only know, but you should understand your investment options. Look into the choices that will not only give you the highest returns, but also how it will complement your financial needs considering the risk that you will take on the investment.
In terms of your retirement plan options, here are your common choices:
401(k). This is a sponsored plan from your employer that has tax incentives. It is automatically deducted from your salary before taxes and the amount that you contribute will be matched by your employer – at least this is the common practice.
IRAs. Short for Individual Retirement Accounts, this is a personal savings account that you will set up towards certain investments wherein any growth will be tax-deferred.
Roth IRA. This is a lot similar to the IRA except for the fact that your contribution will not be tax deductible – although your withdrawals will be tax free (at least after a certain age limit).
SEP IRAs. This is an option for employers and self-employed individuals.
In terms of your portfolio investments, here are the popular options to grow your money:
Stocks. These are shares that you will buy to represent ownership of your chosen company. Your money will grow depending on the value of the stocks – which in turn is dependent on the performance of the company in the market.
Annuities. These are insurance products that will provide retirees with periodic income either monthly, quarterly or annually. It can also be withdrawn entirely by the account holder.
Bonds. These are securities that will be given to you in exchange for money that you will lend. Payments on the “debt” will depend on the face value of the bond.
Mutual Funds. These are managed by a money manager and invested together with other investor’s money.
ETFs. Short for Exchange Traded Funds, it works like a mutual fund but is bought as sold like stocks.
Cash Investments. These are low risk investments that give quick yet low returns.
Make sure that any investment you make will be carefully calculated so you know if the returns will be enough for your retirement needs. That is how you go about smart retirement investing. You can use online calculators to determine if it is enough. One option is the retirement calculator of AARP.org that will tell you if you are saving enough and your choices to grow it further. There are other tools like this one so feel free to search the Internet for them.
Rule 2: Act on your future now
The second rule that you have to follow is to act now. Waiting until the last minute is one of the mistakes to avoid in retirement planning. The earlier you start the less of a hassle retirement investing will be. Here are some of the reasons why.
If you start in your 20s, you only have to contribute a small amount every month to fulfill a modest retirement fund. As you grow older, the time between your current age and retirement gets shorter so your contributions will naturally be bigger.
You get to have time to recoup losses. When you start young, you can risk your money a lot more because you know that you have the time to recoup losses in case something goes wrong. This increases your money’s growth potential.
You develop a saving and investing habit early – which will make it more natural for you.
Your experience with retirement investing will be greater and thus make you more knowledgeable of the trade. The more experience you have, the more you can utilize investing to grow your money.
For the last part, you just have to be careful about how you will strategize your investments because you might get too overconfident. Try to keep your emotions from clouding a sound investment strategy. Even if you lose some money, do not be discouraged. Trust in your instinct and when in doubt, risk only what you can afford to lose.
Rule 3: Pay attention to the market and professional advice
The last rule to follow in investing is to pay attention. There are two areas that you have to pay attention to.
Keep track of the market
Even if the broker is taking care of your investments, you have to keep watch of the market. Know what industries, companies and stocks are gaining. This will help you make a decision if you will be buying or selling. In case certain industries are forecasted to be going down, you might want to sell your stocks to minimize your losses. Or if the trend is going up, you can buy more shares, wait for it to go up and then sell your stocks to profit from the trade.
Not only that, be aware of the industry standards when it comes to the fees that your broker is charging you. There are transaction fees, loads or commissions and other administration fees that you have to know.
Listen to professional advice
Apart from your broker, you may want to hire a financial planner – at least to help explain your options about retirement investing. Since retirement is one of the life events that need financial planning, a professional can be hired to help you out. Do not be afraid to ask for help if you are unsure about any major financial decision that you will make.
Not only that, you can explore for advice online through authority websites and prominent financial figures. Learning from those who have experienced success through investing is a great way to educate yourself.