Investing money for retirement is one of the biggest financial challenges facing most Americans today. There are simply too many things that the average person needs to think and learn about. Such things as determining how much to invest, which investment vehicles to use, and what strategy to use to grow your portfolio can all of these can be seriously overwhelming.
A well-thought-out financial portfolio allows you to grow your money and devote whatever cash you have to the potential for profitable returns in days to come. Such assets may include individual stocks, bonds, mutual funds, real estate, money market accounts, and other assets. Asset allocation is the key. Having just the right mixture of low-risk investments, short-term investing, cash flow, debt, and a proper time horizon for investing in stocks, is crucial to achieving your long-term financial goals and having a well-rounded retirement plan.
But how do you start investing for retirement?
Well, first, one of the most critical aspects of creating a successful plan lies in finding the right balance between risk and returns. For you to build that much-needed nest egg, you’ll need to identify your risk tolerance and determine how much time you have for you to grow your money. Doing this will help you set actionable long-term goals that will help you reach your financial goals in the long run.
Here is a step-by-step guide on investing your money and how you can get your priorities right and achieve your goals when saving money for your retirement.
Review Your Needs And Investing Goals
Let’s first get this out of the way. It is essential to think about what you truly want for your eventual retirement. Identify your needs, your goals, your risk appetite, and how soon you need to get your money back.
Are you putting your money away for retirement, or saving for a house deposit? Whichever your goal is, planning the kind of financial instruments you’ll use should be the crucial first step of your investment strategy.
For instance, let’s say you’re saving for a house or other things that you’re hoping to redeem in a few years. Putting your money away into funds or shares may not be your best option because these assets may be quite volatile in the short-term. Instead, you can go for a cash savings account, money market account, or even a good old fashioned checking account to see that goal to fruition.
However, people saving their money for retirement in things such as stocks, bonds, mutual funds, real estate, and other assets tend to have higher yields and give you a better chance to beat inflation.
Focus On Starting Today
If you’re just beginning your financial journey, start saving as much as you can now and allow compound interest and ROI (return on investment) to work in your favor. Ideally, by beginning to put away money earlier, when your money sits for a longer period of time, it will yield more over time as compared to short-term investments. Short-term goals are great, but time is usually on your side when you invest for the long haul.
Remember, the first cardinal-rule in saving for retirement is: there is no right time to start investing, but in our opinion, “now” is always a good time.
Decide How Much Investing Help You Want
DIY or get help from financial institutions with your investments?
It is perhaps one of the most important decisions on how to invest your money that you’ll have to make when you start investing. While most people decide to follow a “do it yourself’ strategy, others may find it tasking to do the heavy lifting themselves. Hence they may choose to hire a professional to do the legwork.
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If you’re not sure about the best investment tool that will yield you the best returns over time, you can find an advisor to guide you. Ideally, the person should help you look for high-potential products that you feel safe investing in.
Some banks will have financial planners who can help you out. You can also look for referrals from friends and family. Whichever option you go with, be sure to do your homework well on what you need them to help you with.
The truth of the matter is, investing is not always easy, and making the right decisions is pretty difficult for most people. You should never be ashamed of seeking out help.
Automate: Invest With Financial “Robo-Advisors.”
Today, unlike in previous years, the financial markets now have automated asset management services. These services, commonly known as “Robo-advisors,” are helping people to make smarter moves with their money. Whether you have the skills or not, Robo-advisors will use highly-intuitive algorithms to choose the best places to put your money. The best part is, they cost half the price of what you’d pay to retain a face-to-face financial advisor/planner, and you don’t have to pay an overly hefty management fee.
Robo-advisors not only help you build and manage your financial investments but also offers automated tax optimization and portfolio rebalancing with so much precision and ease. And the good news is, you can access these automated investing services online without the need for an expensive broker.
Choose Investments Options That Match Your Risk Tolerance
Once you’ve laid down your financial plan and identified your investment goals, the next step is to choose where you’ll invest your money. While there are an array of investment vehicles to choose from, you’ll want to look at your goals and go for an asset that matches your risk tolerance, while still offering you a higher potential for rewards.
Some of the most common investment instruments to choose from include:
Bonds are a low-risk, fixed-income debt security that allows you to leverage your investment against the success of other entities. When you purchase a bond, you’re essentially loaning money to the government, municipalities, or a company. The government or company selling the bond is then supposed to pay you periodic payments of the interest spread across the bond’s lifecycle. Once the bond has matured, you’ll receive the principal amount invested. The maturity period may be anywhere between 2 years and 50 years.
Some of the common bonds include:
- Corporate bonds: Investment grade bonds and High-yield bonds
- Municipal Bonds (munis): You can either go for General obligation bonds, Conduit bonds, or Revenue bonds.
- Treasury Bonds (T-Bonds)
- Series EE and Series I Savings Bonds
- Agency bonds such as Ginnie Mae and government-sponsored enterprises (GSEs)
Although they offer lower returns, bonds allow you to preserve your capital without taking big risks that could create a large windfall. If you’re nearing retirement, you’ll be more suited to invest in a bond ladder.
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A bond ladder is a bond option that allows you to buy into a series of bonds with staggered maturity dates. This way, you can get small, consecutive cash payments instead of waiting for one lumpsum payout.
Stocks allow you to invest your money in companies that you believe have a chance to grow. By buying shares of a real company, you’ll be owning a small part of the company. The price of your stock can go up as the company creates more value, makes more money, or when people believe more in its value. This way, the price of the stock shifts upwards as the demand increases.
How to invest money in stocks:
- Buying shares in a mutual fund or ETF (exchange-traded fund)
- Buying shares in a company
- By anticipating that the value of a stock will go up and betting on it(long position)
- You can bet that the stock will go down in value (short position)
Caution, however, should be exercised when investing in the stock market. Why? Because you’re investing in a business that can potentially go under. Also, the entire stock market is highly volatile and can lead to massive gains or losses. When investing your money for retirement, look for stocks that have a slow and steady growth rate, and which hopefully offer regular dividend payments. The financial rewards of investing in stocks can be very high if done right, but the risk to your retirement investing plan is also very high.
iii) Mutual Funds
Investing in mutual funds, index funds, and other exchange-traded funds (ETFs) allows you to buy into several bonds, stocks or other investment assets, all at once. Mutual funds are a perfect tool for people looking to diversify their investment since you’ll be buying into a basket of investment, as stated in the fund’s goals. This product is usually managed by a fund manager.
But there’s a kicker:
Mutual fund companies have requirements of the minimum amount to invest, which sometimes can be out of reach if you’re a first-time investor. The fund manager also has to be retained with a monthly percentage fee that can eat into your investment.
If you’re looking for a high-return mutual fund, the S&P 500 index fund is an excellent option. This fund allows you to invest in some of the largest 500 American companies in a single swoop. If you’re a beginner investor, the S&P 500 index fund will give you a highly-liquid, broad, and diversified exposure to the stock market at a low expense ratio.
iv) Real estate
If the traditional mix of bonds and stocks is not an appealing option for you, a real estate investment will provide you with a lucrative and highly-diversified investment portfolio. Investing in real estate has been a tried and true method for achieving both financial independence and building a solid retirement portfolio. But, truth be told, real estate investing has often been a daunting task for most people trying to build their retirement savings.
Here are several ways to invest money in real estate:
- Buy REITs (Real Estate Investment Trusts)
Like mutual funds, REITs allow you to invest in properties without the need to buy a home or a rental property. They offer higher dividends that can be an excellent source of regular income in retirement.
If you’re a new investor, consider buying into publically traded REITs to lower your risks. This can be done through online brokers. The choice of the REIT you buy into will significantly determine the risks and rewards of your investment.
- Use An Online Real Estate Investing Platform
You can also look for online companies that connect real estate developers to investors. Ideally, you’ll be lending the developer your money, which they can use to finance a building project and pay it back in monthly or quarterly distributions.
But there is a kicker. Since most of these are privately owned companies, the investment is often illiquid, meaning that you can’t easily unload them as you would with stocks. They are also highly speculative and require a huge investment to gain any meaningful returns.
- Investing In Rental Properties
You can also buy a vacation home, or a condo in high-value markets and rent it out. If you’re just starting off and your investment portfolio is thin, consider buying a house with several rooms and rent the extra rooms that you’ll not be using. This strategy is called house hacking and is becoming popular among young investors. It essentially means that you’ll be occupying part of your property and renting out the remaining space.
- Consider Flipping Properties
This is also another excellent way to get into real estate investing. It involves buying properties that need some renovations, working on them to increase their value, and then reselling them for a profit. However, this is a more risky option and requires a more hands-on approach.
Pick An Investment Account
Once you’ve decided which tools to use, you’ll require an investment account to get the ball rolling. These investing accounts are wealth management tools, similar to bank accounts, that usually help you to achieve your goals.
Some of the most popular investing accounts include:
If you’re working towards retirement, the following accounts will help you achieve that goal:
- Traditional or Roth individual retirement account (IRA)
If you’re investing money for another goal, these accounts can help you achieve your goals:
- Taxable (nonretirement) account
- College savings accounts such as a 529 account or a Coverdell education savings account
Things To Consider Before You Invest
- How liquid is the investment: Determine how quickly you can get your money if you decide to cash in your investment.
- How much risk is involved?
- What type of earnings can you expect? Is it in the form of rent, dividends, or interest?
- Will your earnings be fixed? What can you expect to earn on your money?
- Are your investments diversified?
- Are there any tax advantages to a particular investment?
The Bottom Line On How To Invest Money?
Keep investing to reach early or rather a safe retirement!
Deciding how to invest can often seem like a daunting task. But it doesn’t have to be! If you’re just getting started, you can easily open an online account with a reputable brokerage firm and use Robo-advisors to manage your portfolio based on your goals and risk tolerance.
Next, you’ll need to figure out which tools to mix and match in your portfolio, how much money you’re willing to invest in each, and how much time you’ll want them to run to see a return. This way, you will have diversified your portfolio across a variety of investment vehicles industries in a way that protects your investment against different market changes.
While none of the above methods guarantees success, you can achieve your goals by effectively managing your risks, monitoring and managing your investments and rebalancing your portfolio regularly. Start your investing journey now, and you may reach your retirement goals much faster.