The Best Places To Invest For Retirement
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A reader named KC recently wrote in with a question about investing for retirement:
Im 28 years old with a wife and a six month old baby. Weve always been money-conscious, but would really like to focus our efforts. We both have Roth IRAs, but are not satisfied with them. They are heavily loaded, and we werent that familiar with them when we were advised to set them up. My question is where you would recommend I go for a long-term investing vehicle? I always hear to go with no-load mutual funds but would like your opinion.
This is a great question. Ive said it before, and Ill say it again Friends dont let friends pay mutual fund sales loads.
My personal preference when it comes to long-term investing centers is low-cost, no-load mutual funds. When I say low cost, what Im really talking about is passively-managed index funds that seek to match the market as a whole, or some segment thereof.
Now the question is where you go to find low-cost index funds. Here you have three general options:
Lets take a look at all three and the pros and cons of each.
Option : Open A Taxable Investment Account
Lots of people assume that you cant invest in a mutual fund unless its in an IRA or a 401. Did you know you can open an investment account through a brokerage firm and put as much money in it as you want? And its a good option if you have money left to save.
There is one big advantage of having a taxable investment account: you can take the money out any time youd like. You dont have to wait until age 59½ to spend it. Why does that matter, since we’d typically tell you to leave all of your investments alone? Well, if you want to retire early, like in your 50s, you will need an income stream. But you wont be able to touch a 401 or IRA without paying big penalties. A taxable account is a good solution to that problem.
The principle of good investing is the same: spread your investments across four categories of funds: growth, growth and income, aggressive growth, and international. Keep a balance across those and youll have a buffer against the ups and downs of the market.
The drawback of this kind of investment is obvious: you pay taxes on any money your account earns. When you pay those taxes will vary, so we wont go into specifics here. Just know that Uncle Sam wants his money, so be ready for that.
Nonqualified Deferred Compensation Plans
Unless youre a top executive in the C-suite, you can pretty much forget about being offered an NQDC plan. There are two main types: One looks like a 401 plan with salary deferrals and a company match, and the other is solely funded by the employer.
The catch is that most often the latter one is not really funded. The employer puts in writing a mere promise to pay and may make bookkeeping entries and set aside funds, but those funds are subject to claims by creditors.
Pros: The benefit is you can save money on a tax-deferred basis, but the employer cant take a tax deduction for its contribution until you start paying income tax on withdrawals.
Cons: They dont offer as much security, because the future promise to pay relies on the solvency of the company.
Theres some risk that you wont get your payments if the company has financial problems, says Littell.
What it means to you: For executives with access to an NQDC plan in addition to a 401 plan, Littells advice is to max out the 401 contributions first. Then if the company is financially secure, contribute to the NQDC plan if its set up like a 401 with a match.
How Should You Alter Your Investment Strategy As You Get Closer To Retirement
As someone nears retirement, it’s common for them to shift their investment strategy toward safer, income-focused assets. Riskier assets like stocks tend to perform better over time, but those who are close to retirement may not have the time to recover from a crash. As their timeline shrinks, people often move money out of stocks and into safer assets that produce steady income.
The Federal Thrift Savings Plan
The Thrift Savings Plan is a lot like a 401 plan on steroids, and its available to government workers and members of the uniformed services.
Participants choose from five low-cost investment options, including a bond fund, an S& P 500 index fund, a small-cap fund and an international stock fund plus a fund that invests in specially issued Treasury securities.
On top of that, federal workers can choose from among several lifecycle funds with different target retirement dates that invest in those core funds, making investment decisions relatively easy.
Pros: Federal employees can get a 5 percent employer contribution to the TSP, which includes a 1 percent non-elective contribution, a dollar-for-dollar match for the next 3 percent and a 50 percent match for the next 2 percent contributed.
The formula is a bit complicated, but if you put in 5 percent, they put in 5 percent, says Littell. Another positive is that the investment fees are shockingly low four hundredths of a percentage point. That translates to 40 cents annually per $1,000 invested much lower than youll find elsewhere.
Cons: As with all defined contribution plans, theres always uncertainty about what your account balance might be when you retire.
What it means to you: You still need to decide how much to contribute, how to invest, and whether to make the Roth election. However, it makes a lot of sense to contribute at least 5 percent of your salary to get the maximum employer contribution.
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The Power Of Investing For The Future
All three of these accounts give you the ability to legally avoid taxes and invest in the stock market to set yourself up for retirement. Here’s what that looks like for your wallet:
As an example, let’s say you max out each of these account in 2022 as a single-filer. That would be a $30,150 in the stock market , and with a modest 7% average rate of return over 30 years, that investment will be worth nearly $230,000.
As another example, lets say you were able to invest $15,000 per year between all three accounts over the next 30 years. Assuming 7% growth, that would leave you with just over $1.5 million for a total investment of $450,000. And if you decided to do it for 35 years, your end result would be over $2.2 million.
Compound interest is built on a key factor: time. The longer your money has time in the market to work for you, the more it will compound and grow.
What Funds Should You Buy
There are a variety of funds types to consider when saving for retirement. Here are the most popular options.
Actively managed mutual funds
These funds have been around for decades and are still the most-popular kind of security among retail investors. They hold a variety of stocks or bonds, and sometimes both, in one investment vehicle. Mutual funds are ideal for people who don’t want to choose their own stocks. Instead, a professional fund manager can do it for you. If you want to own a bunch of international stocks, but don’t want to pick individual companies, then buy an international stock fund. The same goes for tech stocks, U.S. stocks and corporate bonds there’s a fund for everything. The main drawbacks are fees and flexibility. Because someone else is doing the stock picking, fees are higher on actively managed mutual funds than on other kinds of investment vehicles. You also can’t buy or sell them during the day as they’re only priced after the market closes.
Target date funds
Build your portfolio
A lot of people like investing on their own, but when it comes to retirement savings it’s a good idea to work with a financial advisor who has a certified financial planning designation. Here are a few things to look for in a good advisor.
Think about fees
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Which Retirement Plan Is Best For You
In many cases you simply wont have a choice of retirement plans. Youll have to take what your employer offers, whether thats a 401, a 403, a defined-benefit plan or something else. But you can supplement that with an IRA, which is available to anyone regardless of their employer.
Heres a comparison of the pros and cons of a few retirement plans.
Retirement Accounts For Small
According a 2020 Bureau of Labor Statistics report, 33% of workers don’t have access to a workplace retirement plan. At companies with fewer than 100 workers, roughly half of employees are offered a retirement savings plan.
If you work at or run a small company or are self-employed, you might have a different set of retirement plans at your disposal. Some are IRA-based, while others are essentially single-serving-sized 401 plans. And then there are profit-sharing plans, which are a type of defined contribution plan.
Main advantages of plans for the self-employed:
Plans for contractors, the self-employed and small-business owners have higher contribution limits than most employer plans and IRAs.
These plans often offer more investment choices than employer-sponsored plans, such as 401s.
Many of these plans are easy to set up and therefore not much of a burden on the employer that’s you, if you’re a small-business owner.
You might be able to set up your account at a financial institution you already use.
If you’re self-employed, you can give yourself a generous profit-sharing contribution, plus make your elective deferral with catchup as the employee.
Main disadvantages of plans for the self-employed:
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How To Start Saving For Retirement
While starting early is always important even $25 a month in your 20s is helpful it’s OK to set money aside for more immediate needs first and then start tackling retirement in your late 30s and early 40s. However, you don’t want to wait much beyond that because you’ll need time to put money into a retirement account for that money to grow. The longer you wait the more you’ll have to sock away yearly making the challenge a lot more difficult.
Investing After Retirement: Where Is The Best Place To Put Your Retirement Money
So youve worked your whole life to build a sizeable, comfortable retirement account. And youve finally made it youre officially retired. Now comes the fun part at least, if youve done a good job preparing for retirement!
However, retirement also creates much uncertainty for individuals. What will you do with all your free time? How will you stay physically and mentally sharp? And, perhaps most importantly, where to put retirement money after retirement?
If youre curious about how investing after retirement works, youve come to the right place. Were going to help you navigate this convoluted process so you can feel confident about where to put your retirement money after retirement. Following our advice will help you preserve as much capital as possible, even through inflation or recession. And, you will even be able to generate additional income with minimal time and effort necessary!
We know that youre eager to discover the best investments after retirement and well unveil them to you shortly. First, we want to address a common question we see circulating the web: is investing after retirement really necessary?
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How To Get Started
With some of these retirement plans , youll have access to the plan through your employer. So if your employer doesnt offer them, you really dont have that option at all. But if youre self-employed or earn any income, then you have options to set up a retirement plan for yourself.
First, youll need to determine what kind of account youll need. If youre not running a business, then your option is an IRA, but youll need to .
If you do have a business even a one-person shop then you have a few more options, and youll need to come up with the best alternative for your situation.
Then you can contact a financial institution to determine if they offer the kind of plan youre looking for. In the case of IRAs, almost all large financial institutions offer some form of IRA, and you can quickly set up an account at one of the major online brokerages.
In the case of self-employed plans, you may have to look a little more, since not all brokers have every type of plan, but high-quality brokers offer them and often charge no fee to establish one.
A Quick Overview Of Tax
Before diving into actual investments, its worth mentioning that how you hold your retirement savings and investments matters nearly as much as what you invest in.
Uncle Sam doesnt want you out on the street in your dotage years. To both incentivize you to save and reduce your tax liability, the federal government offers a range of tax-advantaged accounts to invest your nest egg.
They start with individual retirement accounts or IRAs, which you open and control yourself . If you dont already have one, review our list of the best IRA account brokerages to help you choose.
Traditional IRA contributions are tax-deductible for an immediate tax break. You must pay taxes on withdrawals in retirement, however. Roth IRAs dont come with an initial tax deduction, but they grow and compound tax-free. You pay no taxes on withdrawals from them in retirement.
Unfortunately, the IRS sets a rather low limit on annual contributions to these accounts. In 2021, you can only contribute $6,000 . You can split your retirement contributions between traditional and Roth accounts if you like.
If youre self-employed you can open a , which comes with much higher contribution limits.
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The Boring Glory Of Index Funds
Your best bet is to buy something called an index fund and keep it forever. Index funds buy every stock or bond in a particular category or market. The advantage is that you know youll be capturing all of the returns available in, say, big American stocks or bonds in emerging markets.
And yes, buying index funds is boring: You usually wont see enormous day-to-day swings in prices the same way you may if you owned Apple stock. But those big swings come with powerful feelings of greed, fear and regret, and those feelings may cause you to buy or sell your investments at the worst possible time. So best to avoid the emotional tumult by touching your investments
Find A Smartvestor Pro
Whether you’re an experienced investor or just starting out, the advice of an investing professional can help you with your financial goals. Seasoned investors dont’ make any big financial decisions without talking to an advisor, and neither should you. If you need help, reach out to one of the investing professionals in our SmartVestor Program. They understand the financial journey you’re on and can help you make a plan or fill in any gaps in your current strategy.
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What To Do If You Have No Retirement Savings
Once youve figured out what your approximate money needs in retirement will be, its time to figure out how to get there. Youll want to boost your savings and make your money work for you so you have enough when you reach the age at which you hope to retire. Even if you have no retirement savings at age 50, it isnt too late to get started. Here are the steps and options you can take:
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Compare And Contrast Your 401 To An Ira
Your 401 was probably set up through your employer, and it may have gotten employer-sponsored contributions. Plans can sometimes have limited payout options, high administrative costs, or subpar investment choices, however if youve got one of those, you may want to move your funds into an individual retirement account . An IRA is a tax-deferred retirement savings account you can set up and manage on your own. You can establish an IRA with a bank, brokerage, or investment firm and use the account to capitalize on stocks, bonds, and other investment options.
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