Investing for Retirement: The Complete Guide
Many things come to mind when you think of retirement, like how much you will need to live comfortably and where to place your money to earn a decent income to sustain yourself. The fact that economies are changing and there are more health crises makes it more challenging to have an exact figure. But it is only by investing for a retirement that your golden years will be peaceful and comfortable.
In the earlier years, bond yields were much higher, and employees had defined benefits pensions that were enough to sustain them in retirement.
However, many employers have moved to defined contributions that are subject to market fluctuations in this era. So, the big question is, how can you retire and live the way you’ve always wanted without worrying about money? This guide explains how to save for retirement and set your goals and invest for retirement.
How to Save for Retirement
Many of us get overwhelmed when we think of life as 70 years old and forget about saving. But don’t let your imagination ruin your life because saving little by little and investing that money will ensure that your later years are sunny.
It would be best if you mapped out your retirement goals to come up with a round-up figure. First, think about the cost of living right now and estimate how much it will have changed.
Then factor in these changes when calculating your living expenses. You will need to factor in housing costs, necessities such as food, clothing and transportation, health care, and vacations.
In previous years, financial experts estimated that one would need to save up to $1 million to live comfortably in retirement. But due to an increase in the cost of living, this has climbed up to $2 million. Now imagine how this will have increased in years to come.
But don’t let the figures overwhelm you, do what you can to save for your retirement. Start saving and investing as early as possible because if you wait to save till you are in your 40s, chances are you’ll not hit your target and may be forced to take up work in your old age.
How to Stay on Track With Your Savings
- Create a budget
Budgeting helps account for every single penny and keeps you focused on your goals. It helps you know how much you need to spend on mortgage, food, clothing, emergency fund, and retirement.
Read Also: The Ultimate Beginner’s Guide to Budgeting and Saving
- Set automatic transfers
You can automatically set your account such that the minute your salary hits your account, the retirement and mortgage amount is paid immediately. This way, you won’t spend money you do not have.
- Have an emergency account
In this life, nothing is set, and emergencies can crop up at any time. For instance, if you did not have an emergency fund before the COVID-19 outbreak and lost your job, life must have been tough.
So always ensure that you have saved up an emergency fund that can cushion you from three to six months. This allows you to cater to your expenses without dipping into your retirement saving or refinancing your mortgage.
- Pay your debts
Before you retire, you must make sure that you have cleared all debts, including your credit card debts. Start with high-interest loans, such as car loans, mortgages, and student.
Read Also: 10 Quick and Easy Ways to Get Out of Debt
How to Start Investing for Retirement
Saving money for retirement is great, but it will not do you any good to just let it rest in a savings account, more so you won’t achieve your goals.
You can invest your money in the following investment options discussed below to earn interest and take you closer to your goals.
- Employer-sponsored plans
If you are employed, you should take advantage of your company’s retirement plan, as this lets you save a certain percentage of your income on a systematic basis. The deductions are made through your payroll, and some companies usually match your contributions.
Furthermore, the majority offers various investment options to choose from, and you benefit from tax-deferred growth until you start withdrawing your funds. Some of these investment options include:
- 401(K)
This permits you to contribute a percentage of your salary pre-tax to a retirement account. The upside of this plan is it reduces your taxable income, and your contribution is free to grow tax-free till you start withdrawing.
Some companies will even match your contribution. So do your research to enjoy these benefits.
The good thing about having this plan is your money can be invested in several high-return investments, including stocks, and you won’t be required to pay tax on the wins until you start withdrawing the funds.
The downside is that you may get a penalty if you remove the money earlier.
Read Also: How to invest in the stock market
- 403(b) plan
The employer offers this and is eligible for people employed by non-profit organizations such as hospitals, churches, or charitable organizations. It works like 401(k).
- Simplified Employee Pension Plan (SEP)
This is available for small businesses or sole proprietors, and it comes with tax benefits and lower administrative costs. Their contributions can be as high as 25% of each eligible employee’s pay; however, you are free to contribute what you can afford.
- Solo 401(k) plan
It is also referred to as SOLO-k, and it is designed for a business owner. And since you are the employer and employee, the elective deferral can be up to $19,500 plus a non-elective contribution of up to 25%.
This plan is better than Simple IRA because it is easy to set up and terminate.
But if your exceeds $250,000, it can be a little bit complex to set up as you’ll be required to file an annual report on form 5500-SE.
- Traditional individual retirement account
This is good for people who are self-employed as it allows you to contribute to your retirement savings. There are various types of IRA with different tax liabilities, so before you invest, educate yourself on the type and pros and cons of the said account.
The upside of investing in a traditional IRA is that your contributions are tax-deductible, but this is done when you are withdrawing. So, it allows your money to compound faster than it would after tax deductions. For instance, if you contribute $7000, your taxable income will decrease by the same amount.
And the tax rate is based on your current year’s tax rate, a plus since in your retirement; you will be in a lower tax bracket since you’ll be earning a little income, meaning that the tax deducted will be minor.
Note: If you withdraw before you are 59 ½ years, you will incur a penalty of 10%, but people impacted by the COVID-19 outbreak were permitted to withdraw up to $100,000 tax-free. You are free to withdraw your funds once you turn 72.
Ensure that you talk with an investment advisor because the maximum contributions vary annually depending on age. And if you do not withdraw the required amount, you may be heavily fined.
- Roth IRAs
These are different from traditional IRAs in that the contributions are made after-tax deductions, and when you withdraw your funds, you do not owe the IRS a dime.
Do your research to see if you are eligible to contribute to this account. You are allowed to contribute $6000 annually, and if you are over 50 years, you can contribute $7000.
- Retirement income fund
This is a unique type of fund where a fund manager assigns your retirement money across a diversified portfolio of stocks and bonds.
Do not place all your money here; place a minimum amount and let the fund manager do their work as you wait for your money to grow. They are best if you start early and if you have someone managing your portfolio.
- Bonds
This is a loan you give to the government or a corporation, and in return, they agree to pay you a set amount of interest for a specific period. After the loan period is over, they return the principal amount you loaned them. This can be a good source of a steady income in your retirement.
Although there are short-term, mid-term, and long-term bonds, it’s best to go for the long-term since you are investing in retirement.
Therefore, if you plan to retire in June of 2040, you should buy a bond that matures in June and ensure that you do the same for the following months. Also, ensure that their face value is more than your initial capital when buying bonds that do not pay out the returns.
