Many people building a long-term retirement corpus frequently face the problem of cobbling together an unstable, risky, and inefficient retirement saving portfolio that offers marginal inflation-beating gains but not enough return. To build an effective investment portfolio that meets your needs, the first step you should do is to classify your occupational risk profile, i.e. how exposed are you to changes in the market for the money you work with every month? Next, figure out your investing temperament – is your risk appetite concentrated more on stocks, bonds, or both?
Once you have sorted through these questions, you can then move on to defining and planning a comprehensive financial strategy. You need to have a detailed overview of what you’re saving goal is, how much you want to save every year, when you want to get to that goal, how much time and effort you are willing to put into saving for retirement, and where you want your money to be kept. To help make this process easier, let us break down these sections more precisely:
Defining Your Savings Goal and Investment Strategy: This is the backbone of any financial planning process, so it makes sense to lay it out first. Your saving goal should be specific, quantitative, and achievable – you can’t invest your way into prosperity, and you don’t want your nest egg to be spread thin! Define your objective in terms of dollars per year and keep this in mind when evaluating your individual investments.
Your Personal Investment Character: Many young people begin their search for the best retirement savings plan by focusing only on compound interest. In other words, they invest in whatever the most investors are investing in, whether it’s index funds or certificates of deposits. Unfortunately, this isn’t good enough for the future, because most of us won’t be able to reinvest these earnings. Instead, we will need to use our discretionary income to invest in things like real estate, safe stocks, or private equity, in order to accumulate at compound interest that can be reinvested for decades.
Investing in “safe” investment strategies is important too, even if you don’t need to reinvest your savings. A great place to start is to diversify your portfolio, so that you have some exposure to different asset classes. If you have a lot of bonds, consider investing in bond funds, or simply buy bond funds with good rates. Another good investment strategy is to own lots of term assets – think CDs and money-market accounts, and invest a portion of your savings each month. These methods won’t return the compounded interest from the top-line investment, but they will allow you to earn a steady rate of interest on your money that can significantly boost your nest egg over time.
If you are worried about your retirement savings being eaten up by high interest rates, you can invest your money in both types of investment vehicles. By using CDs, which can be purchased for less than 5% a year, you are putting your money into a low-risk investment. The returns may not be extremely large, but since most people can’t plan to have their funds invested in real estate and other high-risk ventures, this isn’t a big issue. For a long-term investment strategy, this isn’t quite as important, but if you’re concerned about being stuck paying high interest rates, then this might be the way to go.
When looking for ways to increase your nest egg, look for areas of the market that are unstable. While this isn’t always possible, because you can’t really plan for the future, by looking for stocks that have a low valuation, or that are being sold at bargain prices. It’s also important to remember that you will have more expenses when you retire than you did when you were working. This means that you should be planning for these costs as well, including health care, home maintenance, taxes, and education. All of these things are factors in your retirement savings and investment strategy.
There is also the option of investing in an IRA, which offers you both a traditional IRA and a Roth IRA. The Roth option allows you to invest for tax deferral and leaves you with a higher after-tax income. If you’re looking for extra income, or if you are already retired, then take a look at investing in an IRA. It might be the best way for you to get a leg up on your goals for the future.