Life expectancy is growing worldwide, with the current life expectancy being 78.79 years in the United States. Growth in technology and medicine have helped us to live longer than ever before. With that said, the prospect of saving for retirement — a retirement that’s often forty years away — is often daunting. Investing for retirement in your 30s when you’re still young can be hard to grasp, but you’ll want to start to build financial freedom as early as possible.
However, saving for retirement is only one piece of the puzzle. Of course, saving money is excellent. But you’re going to need investments to give yourself the best retirement possible and a retirement where you have financial freedom and get the most from your savings.
Here’s precisely how you should do that:
How Much Should I Save for My Retirement?
Most financial advisors recommend that people save between 10 and 15 percent of their entire income after tax. But, as you’d expect, many savers will miss that target range and save less than 10 percent.
It’s challenging to save money when you have bills to pay, kids to feed, and current goals which require money. Nonetheless, if you can save at least 10 percent of your income over your lifetime — you’ll have plenty of money to invest.
How Should I Invest for Retirement?
The biggest question of all — how do I invest my hard-earned savings? Once you’ve established how much you want to save, you can decide what you’re going to invest in. There’s so much to consider when you’re building your retirement portfolio, and it can be completely overwhelming. We’re going to give you the best options and keep it simple for you.
It’s important to note that many of these investment options may not be available if you’re saving in your company’s 401(k). Yet, if you use different retirement accounts, you can access other types of investments. Remember, it may be worth withdrawing from your 401(k) after leaving a company and investing it elsewhere.
Target Date Funds
One of the most effective methods of saving money is through a target fund because these investment types are low maintenance and effective. You only need to pick the correct target date — which is the year you want to retire — and the fund company will adjust allocation overtime on your behalf. Sounds pretty straightforward, right?
However, target-date funds aren’t the only investment options for people looking to retire. Having a diverse investment portfolio is one of the best ways of securing financial freedom, and a diverse investment portfolio decreases risk.
Index funds, mutual funds, and EFTs pool investor money into a group of securities. In turn, that allows investors to diversify their investments without having to manage or purchase individual securities.
Here’s a breakdown of the options:
Mutual funds have been managed by professional fund managers for many years. As a result, a team of portfolio managers research, select and analyze various stocks to see which stocks are the best options to be a part of their mutual fund. Many people ask the question, are mutual funds long-term or short-term? In truth, you can choose either short-term mutual funds or long-term mutual funds, and both options have pros and cons.
If you’re saving for retirement, choosing long-term mutual funds is an excellent option. If you’re investing in long-term funds, investors should look at equity funds such as large-cap funds. Alternatively, you could invest in accrual funds. These are a type of debt mutual fund, which means they are short to medium-term low-risk investments.
Index funds are a popular type of mutual fund because they are simple to operate. Unlike mutual funds, there isn’t a fund manager picking stocks. Instead, these funds will purchase shares of a securities index, such as the S&P 500.
Index funds have become very popular in recent years because they offer low fees that keep investor’s costs down, tax advantages, and they’re often a low risk to investors because they’re highly diversified. Warren Buffet, the world’s best-known investor, has praised index funds in recent years.
Exchange-traded funds are similar to mutual funds, but they have one key difference. You can trade these funds throughout the day, similarly to bonds and stocks. However, you can only purchase mutual funds at the end of each trading day at their closing price.
ETF funds are popular because they are lower than the minimum required for similar mutual funds, allowing investors to obtain a broader investment with less money. Moreover, ETFs have the advantage of tax benefits, risk management, trading flexibility, and portfolio diversification.
All of these options provide excellent potential for investors if they invest wisely.
Individual Stocks And Bonds
Some investors prefer to conduct their own research and invest in their own stocks and bonds. Of course, there comes an element of risk with that strategy. Nonetheless, it can take significant investment and understanding to build a diversified portfolio of individual securities.
You can do this by purchasing individual bonds and stocks as part of your investment strategy. For example, you can build a regular income stream through dividend stocks. Purchasing dividend stocks can mitigate risk because they help to manage interest rate risk while generating steady cash flow. What’s more, constructing a bond ladder (buying various bonds that mature over various years) helps to control an investor’s risk while proving a constant cash flow.
Many people feel more at ease when they’ve covered all their expenses with income streams that they can’t outlive. When you buy an annuity, it shifts the risk of outliving your assets away from you and onto the insurance company that pays you an income stream for life. However, you must review the credit rating of the insurance company before purchasing an annuity.
Investors can be more aggressive when purchasing annuities because they provide a definite income stream that increases with market returns. On the other hand, investors may want to be less aggressive when purchasing outside annuities because it puts more risk onto the investor. However, it’s important to note that annuities can be costly. Therefore, you should only buy one with the features that you need.
Buy Rental Real Estate
Rental real estate is an excellent way to invest your savings to build financial freedom for your retirement. That’s because investment property is a safe and reliable long-term investment that can give you passive income and an asset over time. For those with patience, and not those looking for a get-rich-quick-scheme, it’s one of the best options.
Of course, there are maintenance costs and tenants can be an utter headache. That said, you can always outsource the property management to a third party for a cost. But you will need to factor in vacancy rates and complete your homework. That means finding the best real estate in an area with excellent growth potential.
How Does This Fit into My Investment Portfolio?
When you’re selecting your ideal investment products, you should always keep the bigger picture in mind. Therefore, you should consider your time horizon, risk tolerance, and your goals. These factors will point you in the right direction for optimal asset allocation. Also, when you have multiple investment accounts, you should consider these factors when deciding upon your asset allocation.
Retirement accounts should always be the most aggressive part of your investment portfolio because they have the broadest time horizon. Furthermore, you can smooth your entry point in accounts like a 401(k) through dollar-cost averaging.
The most important thing is to have a diverse investment portfolio. The famous old saying, don’t put your eggs in one basket, rings true when you’re investing for retirement. You can create a diverse portfolio through the following ways:
- Active vs. passive – Incorporating index funds and EFTs, which are actively managed and incorporating mutual funds, which are passively managed.
- Size – You should combine a mixture of small-cap, mid-cap, and large-cap companies in your portfolio as part of your diversification.
- Industry – You should always mix the industries of your investment portfolio because economic downturns affect different industries in various ways.
- Style – You should blend a mixture of value stocks and growth stocks in your portfolio. Value stocks are often underpriced, and growth stocks provide rapid profits and sales.
- Geographic location – Sometimes, international stocks can provide excellent returns. But sometimes, U.S stocks and bonds outperform overseas stocks and bonds. It depends, and you should be open to either.
Which Retirement Account Is Best For Me?
So now you have an understanding of the most popular retirement investments. But which investment type should you use? Many investors will choose the following options:
- Employer-sponsored plans, including 401(k), 403(b), and 457(b)
- Self-employed accounts, such as SIMPLE, SEP, solo 401(k), or profit-sharing plans.
- IRAs, Roth or traditional
For the best options to suit your individual needs, ensure you seek professional advice.
As with all investments, it’s always a good idea to contact an expert if you’re unsure of the best option for you and your retirement.
Even if investing for retirement in your 30s is daunting, you should plan for your future now.
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