Do you dream of retiring on a beach in the South Pacific, sipping on cocktails under the shade of a palm tree as you stare out into the ocean? Whatever your dream for retirement, you’ll need a plan to get there.
Recent research into the financial health of Americans shows that the majority of the population is woefully unprepared for their retirement years. Many Americans will have to resort to working until they die, with their hopes of retirement becoming nothing more than a fantasy.
If you want to be one of the few Americans that can afford to spend your senior years living out your retirement years, then you need an investment strategy to help you achieve your goal. Here is a step-by-step guide into investing for your retirement.
Get an Early Start
- 1 Get an Early Start
- 2 Understand Your Investment Goals
- 3 Manage Your Debt
- 4 Basic – Start an IRA
- 5 Basic – Make Use of a 401(k)
- 6 Basic – Diversify into Liquid Assets
- 7 Taking it to the Next Level – Understand the Power of Passive Income
- 8 Intermediate – Purchase Rental Properties
- 9 Intermediate – Start a Business
- 10 Taking it to the Next Level – Improve Your Financial Literacy
- 11 Advanced – Invest in Stocks and Bonds
- 12 In Closing – The Importance of Risk Management
We start our list of tips with the most critical factor in investing in your retirement – get an early start. If you’re entering the workforce, then you must start adopting this strategy as soon as possible. Research shows that Americans who start saving and investing for their retirement in their twenties have a significant advantage over those who start in their thirties.
- However, if you are in your thirties and forties, all hope is not lost for you yet. Getting started with your investment strategy for retirement at a later age does not mean that you won’t be able to retire – it only means that you’ll need to ramp up your efforts considerably, to make up for any lost time.
- If you’re a parent, and you have already started your investment portfolio – good for you. However, what are you doing to secure the financial future of your children? Do you teach them about saving and investing? Studies show that parents who teach their kids financial literacy at a young age are preparing them for success and a prosperous retirement when they reach their senior years.
- The earlier you start with your investment plan for retirement, the more likely you will reach your retirement goals. Teaching your kids about saving and investing gives them a head-start over their peers, installing good habits about money management and financial literacy – pay it forward to the next generation.
Understand Your Investment Goals
You don’t wake up one morning and decide that you are going to pick a bunch of stocks to save for your retirement. Planning for your senior years requires an investment strategy that provides you with a roadmap to guarantee your success.
- Learning the art of goal setting is an invaluable resource for anyone saving for retirement. However, if you know nothing about saving and investing – where do you start? For those Americans lacking the financial literacy to plan for their retirement, it’s best to leverage the expertise of a professional. In this case, hiring a personal financial advisor is the best option.
- A financial advisor helps you customize your road to retirement by assessing your individual needs for you and your family. When sitting down with your advisor, they will ask you about when you plan to retire, and the number you have in mind to live your senior years comfortably.
Everyone’s idea of a comfortable retirement differs, and an advisor provides you with the clarity you need to understand the exact number you’ll need to enjoy your golden years.
Manage Your Debt
You’ll find it challenging to put money away to your investments if you have a mountain of debt you need to pay off to your creditors. Create a spreadsheet of all your outstanding debt, including your credit cards, mortgage, auto loans, student loans, and any store-cards. Calculate what it will take to pay off your debt, and work toward drawing down on this number as soon as possible.
Debts are a liability, and if you let them spiral out of control, they can ruin your retirement plans. Avoid taking on any new debt unless it’s a necessity that you can’t fund with cash. Live a frugal lifestyle where you don’t spend money on things you can’t afford, and pay cash for everything wherever you can to avoid taking on more debt.
Basic – Start an IRA
An Individual Retirement Account should be the first asset you acquire on your road to retirement. An IRA is indispensable for any working American, and contributing a few thousand dollars every year can add up to a significant cash lump sum upon your retirement.
If you start your working career at 25 and save $3,000 per year in your IRA at a 7-percent return for 10-years, then you’ll end up with $338,000 at age 65. Imagine if you maximize your contribution to $6,500 per year, and continue to invest throughout your career.
Young people starting their career should consider investing in a Roth IRA, as opposed to a traditional IRA. A Roth IRA requires you to pay tax on your contributions, but when you withdraw at retirement, you don’t owe the IRS any tax on your money. This benefits young people who start their career in a low tax bracket, enabling them to build a tax-free nest egg for their retirement years.
Basic – Make Use of a 401(k)
The chances are your employer offers a 401(k) plan. This asset works similar to an IRA, in that the money you contribute to the 401(k) gets pooled in an investment account at a financial firm, along with the investments of thousands of other workers.
A professional investment manager oversees the allocation of investor’s funds into a diverse range of assets, including stocks, bonds, property funds, as well as ETFs, index, and mutual funds. You set your risk exposure to the market with the fund manager, and they invest on your behalf.
Most employers will match any contributions you may to your 401(k), by up to 80-percent, allowing you to benefit from free money that grows in your plan. If you change jobs, then it’s possible to transfer your 401(k) to your new employer, without the hassle of paying taxes or huge fees.
Basic – Diversify into Liquid Assets
While 401(k) plans and IRAs are excellent tools to get you started on your road to retirement, you need to be aware of the risks involved with these investments. Both IRAs and 401(k) plans come tied to assets with exposure to global markets. Therefore, should there be another global financial crisis, such as the Great Financial Crisis of 2008, then your portfolio is at risk of sustaining considerable losses in the case of a market shock.
Fortunately, there are ways to mitigate your risk of loss through the use of liquid, hard assets. Gold is the oldest form of money, and when a crisis emerges, investors run to the shiny yellow metal as a safe-haven asset. In the case of a financial crisis that affects currency and equity markets, gold will shoot to the moon, affording you a hedging strategy against any loss in your 401(k) or IRA.
Gold sells for around $1,400 an ounce, and many new investors may struggle to drum up this kind of cash to buy a physical coin. In this case, investing in silver coins provides you with the same hedging strategy, and some investors believe that silver will outperform gold in terms of returns during the next market crash.
Taking it to the Next Level – Understand the Power of Passive Income
After investing in an IRA and 401(k), then hedging them with precious metals, your next step is to get your money working for you to provide another income stream, other than your job. Passive income describes income that you do not have to work for at your job.
Assets generate a passive income that you can use to bolster your other investments further. Here are two examples of how to create passive income from low-risk assets.
Intermediate – Purchase Rental Properties
When you have surplus cash rolling in from your job, you can only contribute $6,500, or $13,000 for married couples, into your IRA. So, what do you do with the rest of your savings? Leaving them in the bank will do you no good, as the bank gives you no interest on your money, and they charge you fees for parking your money in your account.
Take your surplus and place a down payment on a single-family home that you can rent out to tenants. If you continually put your surplus cash into the mortgage, along with the rental from your tenant, then eventually you will reach a point where the income from the rent is more than the cost of the mortgage. This surplus income is income you did not have to work for, otherwise known as passive income.
Intermediate – Start a Business
Once you have a passive income stream that replaces your salary from your job, you no longer have to work for a paycheck. Now it’s time to open a business and increase your income dramatically. However, don’t make the mistake of founding a start-up. Instead, buy a cash business that’s already making money, such as a car wash or an established vending machine business.
Your accountant will review the businesses books to ensure that its making money. It’s important to know that you don’t want to work in the business. The company should already have a full staff and management team; all you do is take over the ownership. This strategy allows you to benefit from the profits while still maintaining enough free time to expand your business interests and your income streams.
Guides to Help you in Business:
- 8 Tips for Turning Your Hobby Into a Business
- How to Get a Business Loan: Complete Guide
- How to Get Funding for Your Business: Complete Guide
- How to Make Your Small Business More Successful: Complete Guide
- Best Business Plan Software: Which is the Right Solution for You?
Taking it to the Next Level – Improve Your Financial Literacy
Now that you have multiple income streams and stable long-term investments with your IRA and 401(k), it’s time to improve your financial knowledge to graduate to the next level as an investor.
Take courses on money management – you’ll have a lot more free time now that your money is working for you, instead of you working for your money. Use this time productively to study the markets and the global economy.
When you have a firm grip on how markets move, and price action on electronic assets like stocks, you are ready to enter the advanced level.
Advanced – Invest in Stocks and Bonds
After improving your financial literacy, you can try to beat the money managers, and invest in the markets yourself. The S&P500 recently reached all-time highs, and if you are savvy with how you buy stocks and bonds, you can make outlandish returns on your money.
Learning to trade the markets as a long term investor, swing trader, or day trader can land you daily profits in the thousands of dollars. Traders also can manage their IRA, taking control of what assets they buy and sell on the markets.
However, you must receive the correct training on how to trade, or you could end up losing all of your funds in one wrong move. This strategy is not for everyone, and some investors may prefer to leave it to the experts instead.
In Closing – The Importance of Risk Management
You must understand that every investment comes with some level of risk that you may lose your money.
- If you are trading the markets, then the use of margin may kill your account quickly.
- If you let a fund manager manage your retirement account, then a market shock may end up leaving you with huge loses.
- Incompetent managers may run your business into the ground, bad tenants may destroy your rental property, and thieves may steal your precious metals.
You need to understand how to manage and mitigate risk if you want to achieve success with your investments.
Real investors know that they are only as successful as the team they build around them. Ensure that you have a competent and skillful accountant and lawyer to manage your affairs.
Only hire qualified staff in your companies, and hire a property company to manage your rental properties., Store your precious metals in a secure facility away from your home, and the bank.
If you follow this step-by-step guide to investing in your retirement, you can expect to have more money than you know what to do with when it comes time to retire, and the chances are that you will end up retiring far earlier than you ever imagined.