Investing for Retirement: A Simple Guide to Grow Your Wealth
Growing your wealth for retirement today looks much different than it did for your parents and grandparents. Now that the average lifespan is longer, your retirement years could last decades — and you’ll be living off of assets that need to account for extra time and inflation.
Because of this change, working with a financial advisor is more necessary than ever. A professional who understands your goals and how to adjust your investments to reach them can be exactly what you need to make strategic planning decisions.
Still, before you take any steps toward investing for retirement, it helps to understand the basics behind growing wealth. This simple guide will start your journey to the best Golden Years financially possible.
1. When to Start Saving
Most of us understand that the sooner we start saving, the better off we’ll be, right? Well, that comes with a caveat. Mathematically speaking, if you have any high-interest debt, like credit cards or personal loans, you should pay those off before putting 10-15% of your income into a savings account.
Think about it: An average high-yield savings account has an APY (annual percentage yield) of around 4%. Although interest is compounded daily in your favor, it takes a long time to earn a decent return. For example, a $10,000 investment at a 4% APY over four years will give you an end total of
$11,734.93 — almost a $2,000 gain. Sounds great for a passive investment!
But wait. What if you had $10,000 in credit card debt that you paid monthly minimums on over that four-year period? Based on an average interest rate of around 28%, it will take 53 months (or more than five years) of a $333 payment to get rid of that debt. During that time, you will have paid $7,400.12 in interest.
Doing the math, it’s wiser to take that lump sum ten grand and pay off your credit card debt, then start putting the $333/month into a savings account. Your numbers will vary (and this credit card calculator can help you understand your financial situation) but the general idea is still the same — don’t start investing in savings until you’ve eliminated your high-interest debt.
2. Where to Start Saving
When you’re ready to start your savings journey, the next question is where to allocate your investments. The answer to this depends on your target goals, financial situation, and risk level, and an expert advisor can help you build a strategic and effective investment plan.
However, to get started, look at what you already have. Your employer has likely already provided you with benefits like a 401(k) plan or an HSA (health savings account) if you have a high-deductible health insurance policy. Generally, the employer matches your contribution up to a specified amount. Review your terms and ensure you’re maximizing these benefits. This article by OJM Group explains why retirement plans and match-contribution investments are essential to your portfolio.
As vital as they are, employer plans aren’t the only type of savings to invest your funds into. These plans usually have early withdrawal penalties or, in the case of HSAs, limits on where to spend the money. Consider investing in a range of other assets, such as IRAs, CDs, mutual funds, index funds, exchange-traded funds (ETFs), annuities, and individual stocks and bonds.
Each of these investments has pros and cons. Some are riskier than others, but the potential return is higher. Others are low-risk, low-reward. Choosing the right investment product for your financial goals is a unique task best performed with the guidance of a professional.
3. Monitor Your Wealth
You’ve paid off your debt, decided on a savings strategy, and started regular investing. Now, you can relax, right? Well, not so fast.
Even if you’ve hired a financial advisor to handle your retirement investments, you’ll still want a hands-on relationship with your money. This connection doesn’t have to be a daily or monthly analysis of how the market is performing unless that’s something you’re passionate about. However, you should monitor the growth or loss of your investments regularly.
The market cycle has peaks and swells. If you’re concerned about an account consistently performing poorly, don’t ignore your doubts. Talk to your advisor about what you’ve seen, and find out their reasoning for keeping the asset as it is. You may have other options, or they could have knowledge you don’t know about the investment.
Remember, while someone else may manage your accounts, the money is yours. Monitoring your portfolio closely will help you avoid surprises when nearing retirement.
Conclusion
Wealth isn’t something that accumulates organically. It requires planning and strategic action to build. With goals, financial knowledge, and a debt-free start, you can begin designing a portfolio that will give you the assets you need to enjoy your retirement — even if it’s an extended one!