Before & After Retirement
The below infographics explains the difference in priority of a retired person from others.
Clarity about this difference is essential before investing. Why? Because in absence of it, people often take wrong investment decisions. So, lets understand the difference:
- Before Retirement: The priority at this stage of life is building retirement corpus. In this phase, the person is doing job to generate income. The person is also investing systematically in growth based options. Why growth? Because the risk is less , and also the available time horizon is longer. Check this retirement planning calculator.
- After Retirement: The priority at this stage of life is building a stable income source. What can be the source? A well built investment portfolio. The portfolio of a retired person consists of such investment options which can generate stable income. Read more about investing for monthly income.
The first priority of a retired person is always income generation, but his/her ideal mix of priorities can be as shown below. This range of priorities ultimates shapes his/her investment portfolio.
Open A Brokerage Account
If youve paid off your credit card debt, established an emergency fund, and exhausted all your tax-advantaged accounts, you can open a regular old brokerage account to squirrel away some more money.
A brokerage account is much like an IRA. Its more flexible in terms of investment choices and money withdrawal than 401s, but you dont get any tax breaks. It allows you to buy and sell a wide variety of securities, from stocks and bonds to mutual funds, currency, and futures and options contracts, through a brokerage firm.
You can open a brokerage account with any of the major investment firms like Vanguard,Charles Schwab, or Fidelity. Just like with other financial accounts, you deposit money and work with a broker to buy or sell securities. The broker will recommend investments depending on your personal financial situation and goals. But you have the final say on investment decisions. The brokerage firm takes a commission for executing your trades, and there are fees linked to the transactions, ranging from account maintenance fees and markups/markdowns to wire fees and account closing fees.
Best for: Aggressive investors with high-risk tolerance and extra savings.
Understand Asset Allocation To Invest For Retirement
Asset allocation is a strategy that helps you choose how much money to put in stocks, bonds and cash when you invest for retirement. Simply put, asset allocation is nothing more than striking a balance among these three core asset classes.
If youre okay with a slightly hands-on approach but prefer to keep things easy, invest for retirement with a simple asset allocation model. A two- or three-fund portfolio based on mutual funds and exchange-traded funds makes it very easy to invest and save for retirement.
One fund targets growth, like an S& P 500 index fund or an international stock index fund. The second fund, like a total bond market fund, generates stable income. Diversify further with a third broad-market ETF or index fund. Asset allocation with only two or three funds still provides diversification, and it keeps you from having to pick and choose tons of stocks or bonds yourself.
Next, decide what percentage of your portfolio balance is invested in these two or three stock and bond funds. Your decision depends on your age and how well you tolerate risk. Investment management firm T. Rowe Price suggests the following simple allocation based on your age:
40s: 80% to 100% stocks, zero to 20% bonds
50s: 65% to 85% stocks, 15% to 35% bonds
60s: 45% to 65% stocks, 30% to 50% bonds, zero to 10% cash/cash-equivalents
70+: 30% to 50% stocks, 40% to 60% bonds, zero to 20% cash/cash-equivalents
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Focus On Physical Health
Given the high costs of health care, focusing on physical fitness today is key to staying fiscally fit in retirement. Health care costs are often overlooked by retirees, despite the fact that its constantly in the news and is still spinning out of control. Health care expenses could really burden your finances when you consider the projections:
Am I Ready To Start Investing
Before you start investing, its important to have the rest of your financial house in order. You should:
- Be comfortable with your budget how much you earn, spend and save each month.
- Be in control of your debt free of high-interest credit card balances and working a plan to pay off student loans and other liabilities.
- Have clear goals defining what you want your money to allow you to do in the future.
You dont have to wait until you are debt-free to start investing But if you have any doubt about whether youre ready to start investing, refer to my article on the seven steps to financial stability before returning to this guide.
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Wells Fargo Can Help As You Plan Your Retirement Income
Everyone has a different vision of retirement. And thats why its important to create a personalized, written retirement income plan that is unique to your specific goals and situation. Get started today by calling us, requesting a retirement consultation, or learning more about planning your retirement income.
Investment and Insurance Products are:
- Not Insured by the FDIC or Any Federal Government Agency
- Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank Affiliate
- Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested
Investment products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.
Wells Fargo & Company and its affiliates do not provide legal or tax advice. In limited circumstances, tax advice may be provided by Wells Fargo Bank, N.A. Please consult your legal and/or tax advisors to determine how this information, and any planned tax results may apply to your situation at the time your tax return is filed.
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Invest In Dividends And Dividend Income Funds
Instead of buying individual stocks that pay dividends, you can choose a dividend income fund. These funds have managers who own and manage dividend-paying stocks for you. Dividends can provide a steady source of retirement income that may rise each year if companies increase their dividend payouts.
However, in bad economic times, dividends can also be reduced or stopped altogether.
Many publicly traded companies produce what are called qualified dividends,” which means the dividends are taxed at a lower tax rate than ordinary income or interest income. For this reason, it may be most tax-efficient to hold funds or stocks which produce qualified dividends within non-retirement accounts , etc).
Be cautious of dividend-paying stocks or funds with yields that are higher than the average rate. High yields always come with additional risks. If something is paying a significantly higher yield, it is doing so to compensate you for taking on additional risk. Dont invest without understanding the risk that you are taking.
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Things To Keep In Mind When Getting Started
This is your current budget, which takes into account all of your present-day income and expenses. While you should have some idea as to what you’ll need to save per month based on your retirement goals, you also need to make sure that you have that money to save. It’s a good idea to put retirement savings as a line item in your budget, just like food and shelter costs, so that you can set aside those funds every month.
This is a tool you can set up between your checking account and your retirement account so you don’t forget to save. Set it up so that on the same day every month maybe it’s the day you get paid funds you’re earmarking for the future go from your bank account into your investments. By doing it this way, there’s no risk of you spending that money.
Having a separate emergency account usually with about three to six months of salary saved up will allow you to cover any unexpected costs without throwing your retirement plans out of whack.
One goal for everyone should be to reach 65 debt-free. That includes credit card debt and especially the high-interest reward card kind car and mortgage loans, any student and other big loans. The reason is simple: you don’t want to be going into your non-earning years owing money.
How Can I Start Investing With Little Money
One of the biggest myths out there is that you need a lot of money to start investing. Wrong! The great news is that you really dont need a lot of money to start investing. Many mutual fund companies allow you to open an account for as little as $50.
Of course, the more you can invest, the betterbut you have to start somewhere. Dont let fear keep you from taking action on your future! This is something that a trusted investment professional can help you work out depending on your unique financial situation.
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Keep Things In Perspective Through Good Times And Bad
Historically, the stock market has seen average returns of about 10%. The key word in that sentence is average. There have been years when the benchmark S& P 500 has grown more than 20%. And then there are years when its performance has sunk deep into the red.
When youre investing for long-term goals like retirement, remember that after all periods of negative performance, the stock market has recovered its losses and kept moving higher. So dont get too hung up on your retirement portfolios performance from day to day, or even from month to month or year to year.
Retirement is a long game, so you need to take the long view.
Benefits Of Planning Your Retirement Income
What is your plan for using your hard-earned savings to produce a steady flow of income throughout your retirement years? Developing a written income plan can help you retire with confidence by considering questions such as: What do I want to do in retirement? Where do I want to live? Do I have enough to retire when Id like? How do I create a steady income stream to take the place of my paycheck? How can I plan for the unexpected, such as extreme market fluctuations, health care needs, and other financial needs? And, will my money last throughout my retirement years?
Starting the retirement income planning process five to 10 years before you retire allows you time to develop a thoughtful, personalized plan that will help make the most of your hard-earned savings.
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Open An Additional Retirement Account
There are plenty of reasons to have more than one or even two retirement accounts. You might consider opening additional retirement accounts if your employer-sponsored plan charges excessively high fees or you dont like the investment options it provides.
If youve been on top of your savings game this year, you might open another retirement account if youve hit annual contribution limits on your main account. Consider opening a traditional IRA or a Roth IRA , and set aside another $6,000 for retirementor $7,000 if youre 50 or older.
Account options become more limited once youve maxed out your annual IRA contributions. If you have a side hustle, take a look at an SEP IRA or Solo 401 to invest some of your earnings. Just remember, while you can have multiple IRAs and 401s accounts, annual contribution limits count across all accounts.
And if youre a really good retirement saver and youve exhausted your tax-advantaged retirement account options, invest in a taxable brokerage account. While they lack the favorable tax treatment of many retirement accounts, theyre still a very useful tool to keep investing for retirement.
Open A Retirement Account
Once youve figured out how much you need to save, its time to open a retirement account. Historically, investments in the stock market have offered significantly better returns than savings accounts, making them the preferred tool for growing your retirement savings.
Not all investment accounts are ideal for retirement savings. To encourage people to save for retirement, the federal government has created special types of investment accounts, popularly known as retirement accounts, that provide certain tax advantages.
There are two main types of retirement accounts: employer-sponsored retirement accounts, like 401s, and individual retirement accounts . In general, both types of accounts are available in traditional and Roth varieties. Both offer tax-advantaged growth of your investment money, but you pick whether youd prefer an income tax break now or in retirement.
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Set An Investment Goal
You can have both long and short term goals when it comes to investing. When youre doing something like, lets say, saving for a house, youll likely want to invest in a safer asset like government bonds, CDs or high yield savings accounts.
Investing for retirement or events that will happen many years in the future can stand a little more risk.
But in addition to this, you need to understand your own risk tolerance. The more risk, the more reward. But its more risk. How comfortable are you losing the money you invest? If it would ruin you, perhaps you should invest in slightly safer investments. If it would suck, but you know youll make it back, riskier may be the way to go.
Its a personal decision. Youll want to weigh the pros and cons of each investment and determine what works best for you situation.
So decide whether this is short term, college, retirement, a Tesla, a dream homewhatever your goal may be. Write it down. And get to it!
Pick An Investment Account
To buy most types of stocks and bonds, you’ll need an investment account. Just as there are a number of bank accounts for different purposes checking, savings, money market, certificates of deposit there are a handful of investment accounts to know about.
Some accounts offer tax advantages if you’re investing for a specific purpose, like retirement. Keep in mind that you may be taxed or penalized if you pull your money out early, or for a reason not considered qualified by the plan rules. Other accounts are general purpose and should be used for goals not related to retirement that dream vacation home, the boat to go with it or a home renovation down the line.
Here’s a list of some of the most popular investing accounts:
If you’re investing for retirement:
» View our roundup of the best IRA providers
If you’re investing for another goal:
Taxable account. Sometimes called nonretirement or nonqualified accounts, these are flexible investment accounts not earmarked for any specific purpose. Unlike retirement accounts, there are no rules on contribution amounts, and you can take money out at any time. These accounts don’t have specific tax advantages. If you’re saving for retirement and you’ve maxed out the above options, you can continue saving in a taxable account.
College savings accounts. Like retirement accounts, these offer tax perks for saving for college. A 529 account and a Coverdell education savings account are commonly used for college savings.
Invest Your Extra Income
You might be wondering, What extra income? But you could have more income than you realize.
Because of a cognitive bias known as mental accounting, you might treat things like your bonuses, tax refunds or even raises instead of income. But each of these can be funneled into your retirement accounts to help you reach your annual contribution goals.
Get An Automated Micro
Small savings add up quickly.
A wave of micro-investing apps have allowed users to invest spare money in small amounts in selected exchange-traded funds , which are securities that track a basket of stocks, bonds, commodities, or indexes like the S& P 500 index, for instance. You can often select a ready-made portfolio depending on your risk tolerance and invest as little as $5 each day.
Take Acorns as an example: It automatically invests a small amount of your money daily, weekly, or monthly. One of Acorns interesting features is rounding up your purchases to the nearest full dollar amount and makes the change available for you to invest.
Lets say you used a credit card to buy a cup of coffee for $2.75. You can choose to invest the 25 cents on the app, or Acorns will invest the change for you if you elect automatic-roundup investments. Its free to open an Acorns account. The app charges $1 per month if your balance is under $5,000, or 0.25 percent per year if your balance is $5,000 or more.
Weve reviewed four micro-investing apps. Read more about their features here.
Best for: People with cash sitting idle in their checking account. And those who have the best intention to save but struggle to get over the emotional barrier. The automated apps help you save spare money and potentially grow it through investing.
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Create A Budget And Follow It
The best way to plan a budget is to know how much you can spend. But alas, most people dont bother to calculate how much they can safely spend in retirement. If you need help starting out, meet with an investment professional, like the majority of people who said they calculated their annual spending in retirement. An investment professional can provide additional insight and tools to help you stay on track with your plan. Speaking of which