As soon as an individual starts an actual career and starts earning a decent amount, the first question that may come to your mind is, How do I invest for retirement? and Where should I invest my retirement money?. Of course, it’s only natural to worry about the future, especially the retirement years when income dries out.
This article guides you on investing money in retirement plans and discusses some options available for precisely this purpose.
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How Much Should You Save for Retirement?
The amount that a person should save for retirement has no straight answer. Some people put a figure of 15% of their income as a savings benchmark; however, this can vary significantly from person to person. For example, someone in their early career, living alone, and living cost-effectively can save more of their income than someone who may be in an advanced stage of their career but is raising a family.
Good retirement planning is a function of how much someone puts away, how often they do, and how early they start.
Putting together a solid retirement plan comprising a diversified investment portfolio with realistic goals can help you live a comfortable life in your retirement years. Calculations show that someone starting to save the same amount of money with the same amount of returns ten years sooner than others can expect to have saved twice as much upon retirement. These investments can be in stocks, bonds, mutual funds, and recently, in cryptocurrency.
Ways How to Invest for Retirement
Here are five ways to invest for retirement.
1. Define Your Retirement Plan: Ideal Age and Retirement Savings
Like any other investment, a retirement investment plan starts with having a clear objective. For some people, a rule of thumb is that their retirement nest egg should be three times their annual salary at the time of retirement. But that figure varies. It comes down to your desired retirement lifestyle.
A simple lifestyle can be maintained with savings of less than $100,000, whereas a more lavish lifestyle requires having more than $1 million in your accounts at retirement time. Generally, you can follow three steps when investing for retirement.
- The current retirement age with full benefits in the U.S. is 66 years and two months. First, calculating the time to retirement provides the foundation for a retirement plan.
- Second, determining the retirement needs provides a savings goal, which helps estimate how much money you need to save annually to reach the goal. It’s important to consider taxes and remaining mortgages at this stage since these affect the final amount that you’ll save.
- The last question to ask is, “How should I invest for retirement to reach my retirement goal?” To this end, various investment types can be placed on the risk-return matrix.
You should seek investment advice or do thorough research when putting together your investment strategies. It’s also advisable to stay on top of your mortgage and estate and consider any other liabilities and obligations that may consume future income (e.g., medical costs associated with older age).
2. Open a Retirement Account
Once a retirement plan is in place, the next step is to open a retirement account. Many types of individual retirement accounts are available. Three of the most notable ones are described below:
Traditional IRA
A traditional IRA allows enormous tax advantages to its owner. The money (up to $6000 for account holders aged below 50 years and up to $7000 for those aged above 50 years) contributed to this retirement account is not taxable, and any profits earned through the investment in this retirement account are also not taxable upon sale of assets if the money remains in the account. This type of IRA also allows account holders limitless forms of investment.
Roth IRA
A Roth IRA is like the traditional IRA in all other aspects except that the funds that go into this account come from tax-excluded income. This means that the account holder has already paid the taxes on their income, which is now being invested in the Roth IRA. This means that Roth IRA holders aren’t required to pay taxes when they begin withdrawing from the account at retirement. Traditional IRA holders, however, do need to pay taxes upon withdrawal from their account at retirement.
Another flexibility with the Roth IRA is that the owner can withdraw the capital amount at any time without taxes. They cannot, however, withdraw their earnings before the time of retirement.
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SEP IRA
A SEP (Simplified Employee Pension) IRA is also set up like a traditional IRA. However, the significant difference is that the employer contributes to the account, not the employee (the account owner). This IRA was launched for small and medium businesses.
This is a freebie retirement account for employees that they do not contribute anything to get full ownership of upon retirement. And for self-employed individuals, this account allows a maximum contribution of $61,000 or 25% of their compensation (whichever may be less). This is significantly higher than the traditional IRA’s contribution resulting in a much higher retirement returns potential.
3. Consider a Crypto IRA to Invest in Digital Assets
When making retirement investment plans, more and more people are including digital assets and cryptocurrencies in their investment portfolios. Crypto IRAs offer all the tax-advantaged accounts to retirement investors for a very low cost.
With some of the notable cryptocurrencies gaining four to six times their value over the last year and growing several hundred times in value since their launch in 2009 and after, investors are tempted to enrich their investment portfolios with digital assets. Digital currency has given a new dimension to the question of how to invest for retirement.
4. Contribute to Your 401(k)
An alternative retirement investment option is to contribute to the 401(k). However, this comes with a significant reliance on the employer, who may not be contributing to the 401(k) account as much as the account owner would desire. And while the owner doesn’t pay taxes on the investment or capital gain in the 401(k), taxes apply to this account when withdrawals begin on retirement.
5. Invest in Stocks, Mutual Funds and EFTs
Another option is to invest in stocks, mutual funds, EFTs, index funds, and mutual funds. These investments typically have higher return rates than bonds and savings accounts and are less binding for the owner to deposit a fixed amount periodically (annuities). They also have few restrictions on withdrawals.
Start Investing for Your Retirement
It can’t be emphasized enough that the key to good retirement investment planning is to start early. As for the best investment option, it’s recommended to have various types of investments discussed above. Cryptocurrency is becoming increasingly popular among retirement investors because of its high yield potential. Even in small amounts, investing in cryptocurrency can increase portfolio value substantially over several years.
