Today, the need for planning, saving and investing – especially for retirement, is more important than ever. Uncertainty with government retirement programs is growing, and employers aren’t contributing as much as they once did for employees. The time to take control of your future is now. Whether you’re just starting out or find yourself late in the game, there’s an investment strategy for you.
Many of us make our first investment decisions when we enter the workforce. If you haven’t already, the first thing you should do is open a Share Account and a Checking Account. These interest-bearing accounts may not earn a lot of money, but your funds are safe, liquid and always available to you. Keep money in these accounts to pay bills, and build an emergency fund equal to three to six months of living expenses. Begin funding these accounts as soon as you collect your first paycheck.
Investing for retirement may not be a top priority now because it’s so far down the road, but you should save something, even if it’s only $25.00 from each paycheck. One option available is to enroll in your employer’s retirement plan and have your contributions automatically deducted from your paycheck.
Take advantage of the power of compound interest and watch these contributions grow over time. Employers often match your contributions, increasing your savings even more! This is money invested long term for retirement, so select a portfolio of stock, bond mutual funds for growth consistent with your risk tolerance. This portfolio will change over time, so continue to study and learn about investing so you can gain confidence in making decisions.
Hopefully you are continuing to build a solid foundation of investments, and have received a few raises. The goal now is to increase retirement contributions in your employer-sponsored plan to up to 15 percent of your salary. Try to increase your savings rate one to two percent per year until the 15 percent target is met.
Evaluate your investment allocation to make sure it is still in line with your risk tolerance. Proper diversification between stocks, bonds and money market funds helps control the risk within your portfolio. Investing more money in stocks will increase risk while bonds and money market funds are lower risk investments. Review your investment accounts annually and make adjustments as needed.
Be prepared for unexpected life events by reviewing your life and disability insurance. At some point, you may become sick or injured and find yourself unable to work. You need to make sure the bills still get paid. Disability insurance provides the income you need to pay bills until you are able to return to work. This will help you avoid using retirement savings to cover living expenses.
Ease the pressure of paying for your child’s college education in the future by saving in the present. Consider establishing a Coverdell Education Savings Account or into a 529 college savings plan.
These are your peak earning years, so use pay raises and bonuses to boost investment savings. Really focus on maximizing your retirement contributions each year. Ideally, you should be investing more than 15 percent of your income toward retirement. You should also have other retirement accounts established like a Roth or Traditional IRA, if you’re eligible.
Your retirement and investment accounts likely have grown in value over the years through monthly contributions and compounding. You may feel confident about making investment decisions, but it wouldn’t hurt to get a second opinion. Contact a financial advisor to review your investment allocation for proper diversification. Your advisor may suggest other investment options that are suitable for you. However, do not invest money in something you do not fully understand.
Stay away from speculative investments such as:
- Silver and gold coins purchased from shopping channels
- Options and futures
- Hedge funds
- Collectibles such as artwork or sports memorabilia
Your 50s and beyond
Years of diligent investing have hopefully allowed you to build a substantial retirement nest egg. Five years from retirement, you should begin to shift out of aggressive stock funds and into bonds and money market funds to reduce portfolio risk. The goal now is to ensure your savings last as long as needed, and provide you with enough cash flow to fund your lifestyle. Again, have your financial advisor review your portfolio to make sure you are on track.
Do not go into retirement with large amounts of consumer debt. If you still have debt, develop a plan to pay it off at least two years prior to retirement. Make sure your estate plan is current, as well. If you do not have an estate plan, contact an estate planning attorney to have your documents created. At a minimum, create a will, living will and a healthcare power of attorney. Having an estate plan can help relieve both emotional and financial burdens.
Finally, if you’re not currently working with one, seek out a financial advisor who will give you a second opinion about your financial goals and strategies.