Nobody wants to spend their entire lives working. Most of us wish we didn’t have to. Because of this, many people start planning for retirement as soon as they start their careers.
However, there are a lot of mistakes you can make when you start investing in your retirement. Unfortunately, minor errors in your 20s or 30s can come back to haunt you as you near retirement age and even wholly throw off your retirement plans.
Regardless of what point you have hit in your career, it’s never too early to plan. These tips can help you make smart financial decisions to get the most out of your retirement investments.
1. Understand All Available Options
When it comes to retirement investments, you have many options. Each option works differently; some come with far more significant risks than others. Understanding the ins and outs of each available option will let you diversify your investment portfolio. Diversity in your portfolio helps you maximize your retirement savings so you can enjoy your golden years.
A 401(k) is a commonly used retirement account. It is an employer-sponsored retirement fund that lets you set aside a percentage of each paycheck into an investment account, which will accrue interest until you reach retirement age. Many employers also offer a “match,” meaning they will contribute to your account based on how much you are putting in, up to a certain amount (i.e., 3%).
An individual retirement account, or IRA for short, is long-term savings account that you can set money into and avoid paying taxes on until you withdraw the funds in retirement. IRAs are not usually employee-sponsored, meaning individuals set them up independently.
An annuity is a special investment fund offered through insurance companies. An individual either sets aside a lump sum or makes contributions to the annuity. Once they pay the annuity in full, the individual can receive regular payments for the rest of their life.
An REIT (real estate investment trust) is an investment option where stakeholders invest money into income-producing real estate. Each investor receives dividends from the properties they’ve invested in, or they can sell their ownership to someone else.
Stocks are a form of investment where an individual purchases shares of a company at the current price, then resells the shares at a later date. The goal with stocks is to sell for a profit, but there is a risk of losing money on your investment if the company’s value drops.
Savings accounts are places where you can deposit money to keep it safe. Most savings accounts accrue interest, but the interest rates are often much lower than other investment accounts. That being said, there are different savings accounts you can choose from, and no risk of losing money.
2. Start Saving Immediately
Retirement investments are meant to grow over time. Therefore, investing early is the best way to maximize your retirement savings. When you start investing early, your money has more time to gain interest.
Retirement accounts accrue compounding interest, which means the fund continues to grow exponentially over time. If you can set aside even a tiny amount from a young age, you will be much better off than if you start putting large sums of money into your retirement accounts in your 40s.
Also, most retirement investments have caps on how much you can place into the account each year. Therefore, you can’t put off investing in your retirement and try to play catch up later on. Instead, you’ll be stuck working extra years because of poor planning.
3. Take Advantage of Employer Retirement Plans
Many employers offer 401(k) investment plans. When you enroll, the funds are usually taken out pre-tax, which lowers the taxes you pay on each check. The money then sits in your investment account and accumulates interest.
If you are concerned about how much taxes you will pay when you withdraw the funds in retirement, some employers offer to invest in a Roth 401(k. With a Roth 401(k), you pay taxes before the money goes into your retirement account. You do not pay taxes when you withdraw the funds upon retirement. This can be beneficial and may increase your payout.
Furthermore, many employers offer a 401(k) match. For every dollar you contribute towards your 401(k), your employer will match that investment (up to a certain amount). This doubles your retirement investment without removing any additional funds from your paychecks.
4. Pay Down Your Debt
Debt not only makes it harder for you to set aside money for retirement but also compounds at a much faster rate than your retirement investments. The longer you carry around debt, the harder it will be to get on the other side of it before you reach retirement age.
If you can, start by only investing a small amount towards your retirement and putting any additional income you have after bills towards paying down high-interest debt like credit cards or student loans. Once you pay them down, you can start investing more money into your retirement accounts. Then, you will be able to retire without the burden of debt and with the peace of mind that comes with retrirement investments.
5. Look Out for Hidden Fees
Just like anything else, retirement accounts come with fees. Unfortunately, people do not always notice the fees that get working to your account, and these fees can cost you a lot of money both in the short-term and when you retire.
Some common fees associated with retirement investment accounts include:
- Administrative fees
- Expense ratios
- Transaction fees
These fees can lower your overall investment and hurt your long-term retirement saving goals. If you notice you are paying a lot of fees, you can shop around to find investment firms who offer lower rates or don’t include as many fees. Typically, all the fees you pay will be listed on your account statements, which you should receive throughout the year.
6. Open an IRA
IRAs are some of the most diverse retirement investment accounts you can open. Typically, individual retirement accounts offer options to place your money into stocks, mutual funds, bonds, and more. You can determine which option will do the most work for you and plan accordingly.
Also, IRAs can be Roth or not Roth, just like with 401(s)s. With a Roth IRA, you pay taxes before the money goes into the account. Then, you don’t have to pay when you withdraw. Also, Roth IRAs don’t have a required date you must start making withdrawals, so you can let these funds accumulate as much interest as possible before you tap into them.
Although you can only invest a little in these accounts per year (the cap is $6000 per year), the diversity of investment options can help you earn more money by the time you retire. Also, you can include IRA investments on your tax return, which will give you an additional tax deduction.
7. Reevaluate Your Plan Regularly
The only thing that remains constant in our lives is the fact that everything is constantly changing. Your income will fluctuate, as will your debt and other financial obligations. There may be some years where you can invest much more towards your retirement than others, and that’s OK.
You can change your retirement account contributions at any time. Most people review their contributions twice per year or anytime they experience a change in their income. If you pay off a loan, you may want to continue setting money aside in an IRA.
When you evaluate your retirement investments, don’t just look at your contributions. Also, look at whether or not your accounts are gaining you the interest you would like. If not, you can always change your investments or contribute your money to a different fund so it earns more interest.
Bonus Tip: Hire a Wealth Advisor
Planning for retirement isn’t easy, but there’s no reason you need to do it alone. You wouldn’t perform surgery on yourself, so why plan your retirement investments without professional help?
A wealth advisor, or wealth manager, is a licensed professional trained to help families manage their financial wealth. These advisors help people like you develop intelligent strategies for their retirement investments, so you are financially set when you decide to punch out at work for the last time and enjoy your golden years. They can also help you plan for taxes, fees, and estate planning, so you have all your ducks in a row when you retire.
Wealth advisors provide specialized recommendations for people who already have a significant net worth or would like to accrue one. Wealth advisors are also a bit different than financial planners since financial planners provide advice in broad strokes. Also, most wealth advisors receive specialized certifications from the Financial Industry Regulatory Authority (FINRA).
Whether you’re just getting started with retirement investments or nearing retirement, these tips can help you get the most out of your retirement investments. Just remember: You don’t have to do this alone.