Saving for retirement should be a top priority for everyone. It doesn’t matter if you’re just starting your first job or you’re about to move away from the workforce; if you have time, you have to make the best out of it. For that reason, most people start looking for profitable investments to grow their retirement portfolios. However, not every kind of investment can be described as smart, and that can only be judged according to your situation. This is why we’re going to go over effective options that will prove to be reliable ways to invest money for your retirement.
Retirement Accounts
First things first, let’s talk about the retirement accounts that will hold your investment returns. You have three options: saving money in the retirement account offered by your employer, opening a self-directed IRA, or saving in a normal investment account. Let’s explore the three options in more detail.
1. Employer-Sponsored Plans
Your employer may offer you more than one option to choose from or they can just offer a default account for all employees. An employer-sponsored plan can be 401(k), 403 (k), HSA, or other plans. These plans can either be traditional or Roth. A traditional plan will allow you to contribute pre-tax money, so you can escape taxes on the money you put into the account, while a Roth plan uses income after taxes, so you can get around taxes when you withdraw from the plan. One of the greatest features of this option is when your employer offers to match your contributions to the plan, which is something you totally have to take advantage of.
2. Self-Directed IRAs
Perhaps the downside of employer-offered plans is that you become restricted by their investment options. Alternatively, you can open a self-directed IRA account. The financial planners on this site explain the advantages of this option, where self-directed IRAs give you more flexibility in diversifying your portfolio beyond the traditional forms of investment. You’ll still be able to invest in the traditional categories, like bonds and stocks, but you’ll have the added advantage of seeking alternative forms of investments as well.
3. Investment Account
While the first two options offer the best deals for retirement investment, they have one significant shortcoming. These kinds of accounts are capped at a certain maximum regarding the money you can save on them monthly and annually. You may not have any issues with this limit if you’ve started early on, with more than 30 years left until your retirement. However, for those who’re looking for ways to catch up on their savings while nearing their retirement, a normal investment account offers them more flexibility. Unfortunately, this option won’t include any tax-advantages.
Reliable Investment Options
With your savings account in place, it’s time to address the question you’ve been wondering about. What should you invest in? Technically speaking, you can invest in any category. Asset classes usually include three categories: stocks, bonds, and cash equivalents. There are also alternative forms of investment. The only factor that will restrict your freedom is the age at which you start saving for retirement, although a good retirement portfolio will usually include all of the previous forms of investment.
That being said, here are your options.
1. Stocks
Stocks are best for long-term investments; they give you the largest investment returns over the years. However, they’re highly volatile in nature, and that makes them a poor investment choice if you’re looking for a short-term investment. That means that they’re high-risk investments that you should stay away from if you’re nearing retirement, but they’re great if you have more than 30 years ahead of you to save money. A long duration of investment can also overcome the effect of inflation, adding to their investment return vs risk advantage.
2. Bonds
Bonds come somewhere in between stocks and cash equivalents in both the risk factor and the investment returns. They’re not as volatile as stocks, and they’re also secure and stable in their interest accumulation. All of that makes them a safer form of investment. Moreover, you can also find bonds that provide tax-free income. On the other hand, they give less long-term returns compared to stocks. It’s common for people to change their asset allocation as they age, decreasing their investment in stocks and increasing it in bonds.
3. Cash Equivalents
Cash equivalents offer the least returns, but they also come with the least risk of all forms of investment. They have the advantage of being highly liquid, allowing you to withdraw them at any time without penalties. Cash equivalents are usually used for short-term securities, and they include certificates of deposit, treasury bills, corporate commercial paper, and other money-market funds.
4. Alternative Investments
In addition to the primary three investment assets, many people are increasingly seeking alternative investments. These investments can be in the form of private equity, real estate, gold, or other hard assets. Some also invest in artifacts and the like. Although these forms of investment may not be as secure or reliable as the primary three assets, they’re a great option for mitigating the risk that comes with market fluctuations. For instance, you may find the stock market crashing all of a sudden due to a worldwide pandemic. Unless you have an alternative form of investment that adds to your portfolio during such challenging times, you’ll suffer from the aftermath of that crash.
However, alternative investments are not available with all retirement accounts. You’ll have to open a self-directed IRA with a passive custodian to have the freedom to invest in any assets you choose. While a self-directed IRA may offer you a certain level of freedom in alternate investing, you’ll still be limited to the products your bank or financial institute sells. To invest in a more controversial way, like cryptocurrency, you’ll need a passive custodian.
It’s never too early to start saving for retirement, but it’s never too late either. You can always start at any point in your life, although starting early surely gives you the advantage. The whole difference lies in the way you approach retirement investment. For instance, risky investments like stocks are better when you’re in it for the long-term, while more secure kinds of investment can be a smarter option the closer you get to retirement. In short, your options will significantly vary depending on the age you start saving and your estimated retirement age.
