Investing for Your Retirement
It’s usually best to get an early start on saving and investing for retirement. It’s not something that’s usually on your mind in your twenties and thirties, but it’s easier to make sure you have enough if you start early. Most retirement accounts have compounding interest, increasing the amount by which your funds will increase over time. Over decades, it can make a substantial difference.
That said, life happens. Sometimes low income or financial burdens prevent you from setting money aside, let alone making investments that generate additional income. Even if you’re not planning on retiring very soon, you may eventually need to. Some companies will force older workers out. You may also face health problems or other issues that prevent you from continuing to work.
The amount you need for retirement can vary substantially. If you’re starting late, you may need to invest larger amounts than if you were in your thirties.
As far as retirement funds go, you have three main options.
- Employer retirement accounts, such as 401(k)s. This is a popular option, offered by many companies. The money can increase without being taxed, until you finally decide to withdraw it. (Withdrawing early does come with additional financial penalties, though.)
- Individual retirement accounts (IRAs). An IRA is a tax-advantaged retirement account available through banks to individuals, rather than through a company for employees. Like 401(k) accounts, there are tax benefits you wouldn’t get with a basic savings account.
- Regular investment accounts. These don’t come with the same tax advantages as 401(k)s or IRAs, but many people use them if they’re ineligible for retirement-specific accounts, or if they need to save additional money.
Tips for Investing as a Senior Over 70
Investment helps your money make more money for you. Money in employer 401(k)s is generally invested in safe options, so that it can grow. Unfortunately, there have been times in the past where this worked out unusually poorly. In the wake of the 2008 subprime mortgage crises, some people found their 401(k) savings or even IRAs wiped out.
There are three asset classes for investment: stocks, bonds, and cash. Most people’s portfolios contain a mix of all three.
Stocks represent a small stake in a company that offers its stocks to the public. There are all kinds of companies from which you can buy stock, in all kinds of industries. This includes well known corporations like Facebook, Google, and Disney.
Stock holdings make money when the value of that “piece of the company” increases, as the company’s profitability and value increase as a whole. If a company grows and does well, the stock prices go up. If it has financial problems, the stock prices go down. In a worst case scenario, the stock can tank significantly, as occurred with many tech companies during the infamous “dot com bubble” of the late ‘90s and early 2000s.
You can collect income from stock holdings by either selling the stock for more than you paid for it, or buy collecting dividends issued by the company. Dividends are generally issued as quarterly payments, and are more likely to be available from venerable, established companies than from companies with a more recent IPO (initial public offering).
Investors will generally reinvest most of their dividends back into additional stocks.
Bonds are little different. They’re issued by companies or governments to help raise funds for certain projects. You’re basically lending money for a set period of time. In return, you get interest. Different bonds have different times to maturity. Issuers that are very stable generally offer lower interest rates, but at very low risk. Conversely, issuers that aren’t as stable offer higher interest, but at the price of taking a greater risk of losing your money entirely.
For the most part, stocks make more money than bonds. However, bonds have the advantage of being more stable, more reliable, and lower risk. They aren’t as likely to lose money as stocks, and they pay out interest regularly, giving you a reliable income stream. Some bonds also offer you income tax-free.
Bonds aren’t entirely risk free, of course. As time passes and inflation occurs, the amount of money you get may no longer pay for as much as it used to. There’s also a chance the bond issuer will be unable to pay out. Like stocks, bond prices rise and fall with the ebb and flow of markets.
The safest, most reliable bonds are US Treasury bonds.
Creating a Strong Financial Plan
A good investment plan for retirement generally consists of a mixture of stocks, bonds, and cash. This is known as “asset allocation.” As you get older, your asset allocation may change over time. It’s wise to shift more toward low risk investments, rather than taking chances on the latest tech IPO.
Stocks offer potential for a lot of long term growth, but the downside is that they’re notoriously volatile. As you get older, the amount of time you have to work with goes down. So while a risky stock that might pay off can be a smart choice in your twenties, it could endanger your retirement savings if you’re in your sixties.
There’s an old rule of thumb that if you subtract your age from 100, you’re left with the percentage of your assets that should be allocated into stocks.
You may want to increase your allocation into bonds instead. They may not grow as quickly, but they’re a lot more stable. You’re far less likely to lose a significant amount of money on bonds than stocks.
Along with stocks and bonds, it’s also a good idea to have some cash, or “cash equivalents” like money market funds. These offer the lowest rate of growth, but the risk is very, very low. As you approach retirement age, you may want to move more of your assets into cash, keeping it safe and making it more accessible.