4 Easy Tips for Choosing Investments
for Your Retirement Savings

4 Easy Tips for Choosing Investments for Your Retirement Savings - InvestGrowRepeat.com

Andrew Altman

So, you're ready to start putting away money towards retirement but you have no idea where to start?

No problem. In this article, we are going to look at some of the things that you should be considering when investing for retirement.

Tip #1: Choose an Account Type that Fits Your Needs

The first step for saving for retirement is to make sure that the account you are going to be using to purchase investments is the type of account that fits your investing needs. There are basically three types of accounts:

  • Traditional Retirement accounts
  • Roth Retirement accounts
  • Traditional Brokerage accounts

A Traditional Retirement account, such as an IRA, is the account that many people normally use to save for their retirement. This doesn't mean that it is the best necessarily, but it is fairly simple to understand.

When you put money into this kind of account, that money comes from pre-tax dollars and is allowed to be invested tax free until you retire. When you retire, any funds that you pull from this kind of account will be taxed at your current ordinary income tax rate. Also, if you want to pull out money early before retirement, then it will face a penalty.

A Roth Retirement account (Roth IRA) is another type of retirement account that you can choose for investing. While your contributions to this type of account will be made with post-tax dollars (i.e. not tax free), withdrawals that you make at retirement will generally be tax free. This type of account is especially useful if you think you will have a higher tax rate, due to a larger income, later on in life.

With a Roth IRA, you are also allowed to withdraw any contributions that you made, tax-free, at any point before retirement; however, you are not allowed to withdraw any dividends or gains that you make from your investments without paying a penalty. In this manner, a Roth retirement account lets you have a little more access to your money, acting as a investment/savings account hybrid.

Finally, a Traditional Brokerage account is a regular investment account not specifically designated for retirement. Since it is not a retirement account, you can add and remove money from this kind of account whenever you desire. While it can be great to have easy access to your money, this kind of account doesn't provide the tax-shield benefits of a retirement account.

Furthermore, any gains that you make from selling stocks in this type of account are taxed in the year that you make the sell, which means that you may face increased taxes when attempting to use a traditional brokerage account to save for retirement.

Tip #2: Know How Much Risk You Are Willing to Take On

There is something in investing that we call the "risk-reward complex." Generally speaking, the more risk that you are willing to take on with an investment, the higher you should expect to be compensated in return.

For example, an incredibly safe investment like a government bond may only return 1-2% per year, whereas an investment in a real estate stock may return 15-20% per year. Why is this? Since the real estate stock carries much more inherent risk, investors require that this investment pay a higher return than government bonds that are incredibly safe.

Of course, there are points where the risk-reward dynamic is not balanced. For example, there are a type of investments called "junk bonds" that can return as much as 30-40% a year on your investment, but they are so incredibly risky that it is almost impossible to pick a junk bond that will survive. As a result, the reward isn't balanced with the risk. We tend to try to stay away from these types of investments.

It is important to get a good return on your money, but it is also very important to sleep well at night without worrying about investments. As a result, you should know your personal risk tolerance level, as this will help you to make decisions on which stocks, bonds, and other funds to invest in for retirement.

Tip #3: Know Your Time Horizon

For those of you who have never heard the term "time horizon" before, it is simply a way of saying, "How long until you need the money?" The answer to this question is different for everyone. Some of us have $10,000 sitting around that we can throw into the stock market and leave there for 20 years. Others of us couldn't bear to spare more than $20 each month to invest.

Depending on your personal situation, you will have a specific time horizon for each investment that you make. For example, if you have $10,000 to invest today but you need the money in one year, then it may not be best to invest in the stock market. Why? Because there is a very good possibility that the stock market could be lower in value one year from now than it is today, even though it is basically a guarantee it will be higher in 10 years.

In that type of situation, it would be better to put your money into a short-term investment that is safe - something like a certificate of deposit from a bank or a 3-month T-bill from the US Government.

Knowing your time horizon helps you to determine what investments you can make. As another example, if you find an investment you believe will have an average return of 10% over the next five years, then you will want to stay locked into that investment for five years. The average return may be 10%, but it may go down the first year by 5% and then go up by 20% year 2.

If you cannot afford to invest the money right now due to other constraints, then you will need to find a different investment.

Tip #4: Get a Personal Financial Adviser on Your Side

The investing world is complex and the kinds of investments that are available is shifting all of the time. Add this to the fact that humans are very emotional beings, and become even more so when dealing with their money. So for most people, investing for retirement is a difficult process.

That is why one of the smartest investment decisions you can make right off the bat is to find a personal financial advisor that you trust, who can guide you. This person will be able to help you define your financial objectives, will be able to educate you on the different kinds of investments, and can talk with you to determine your suitability for different kinds of investments.

While many financial advisors will charge a small yearly fee or a per-visit charge for their services, you will find that having the help of a trained finance professional on your side is an invaluable tool to have.

Furthermore, it is important to have someone working for you who can look at your financial situation holistically and neutrally to determine the best-fit options as you save for retirement.

The Truth: There is No One Answer for Everyone

Investments are not as black and white as many would have you to believe. They are many nuances, many of which are difficult to understand, and whether or not they are good for you depends on a wide variety of factors.

Still, it is incredibly important that you begin to save early and often because compound interest and time are your greatest allies when it comes to saving for retirement. As you begin this journey, if you will follow the tips listed above, we believe that you will experience increased success in your investing journey.

Andrew Altman is the editor-in-chief of SlickBucks.com. SlickBucks is dedicated to people who want to learn more about how to grow their financial wealth and achieve their financial goals by investing. For better money management, Andrew shares practical advice, reviews, and strategies for both investing and saving money.

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