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Planning Retirement Investment: The Right Way!

Making retirement comfortable is probably the biggest financial challenge that anyone can face. Unfortunately, many people are not prepared for this challenge.

Perhaps the main reason people save is to secure a comfortable retirement. As such, it is key to a successful retirement savings strategy to find the correct balance between risk and investment return Here are some suggestions for how to make the smartest possible retirement decisions.

Social Security is only intended to supplement a portion of retirement income, but those who expect to retire in the future, regardless of how much money they have saved, need to create a retirement plan.

Have a 10-year ahead plan

Ten years is enough to achieve a strong financial base. You can always make your life better! You will make decent profits with careful planning in 10 years.

People who are short of savings should make reasonable assessments of their financial condition. With a little effort now, a world of difference can be made.

Assess your current situation

No one wants to accept that they are not ready to retire, but an honest evaluation of where you are financially now is crucial to building a strategy that can fix any shortcomings accurately.

Start by counting how many retirement accounts you have accrued. This includes balance sheets for individual retirement plans (IRAs) and retirement plans such as 401(k) or 403 (b).

If you are to make special use of them for retirement, have taxable accounts, but do not include investments on emergencies or bigger purchases like a new vehicle.

Identify sources of income

Existing retirement accounts should provide the lion's share of retirement monthly income, but this may not be the only source. Additional income can come from a variety of sources outside of investments, and that money should also be considered.

Most workers are eligible for Social Security benefits based on how much they earn, how long they have worked, and the age at which they begin to receive benefits. The Social Security website offers an estimator to help calculate the amount of monthly income after retirement.

If you are lucky enough to be covered by a pension plan, you can add monthly income from that asset. You can still count your salary from part-time jobs when you are in retirement. 

Consider your retirement goals

This shows to be an important aspect of individual retirement planning. Someone who wants to downsize to a smaller property but would rather enjoy a peaceful, modest lifestyle would have very different financial needs than someone who desires to travel frequently.

You should budget daily expenses in retirement, like housing, food, eating out, and leisure activities. You will have medical bills more often at later ages in your life, so be sure to weigh the costs of health benefits, long-term care insurance, prescription medications, and doctor's visits.

Set a target retirement age

Someone who is only 10 years from retirement can be as young as 45 if they are well fully prepared financially and ready to leave the job or as old as 65 or 70 if they are not.

As life expectancy continues to increase, people in good health can make their retirement planning calculations, thinking they need to finance a retirement that might theoretically last three decades or even longer.

Planning for retirement means deciding not only your expected spending patterns on retirement but also how many years of retirement will last. A retirement that extends 30 to 40 years is very different from a retirement that can last just half of that time.

Although early retirement may be a goal for many employees, a realistic target retirement date will strike a balance between the size of the retirement account and the period of the retirement of the egg nest.

Assess your risk tolerance

At different ages, risk tolerance is different. When employees begin to hit retirement age, the distribution of portfolios can progressively become more conservative to maintain accumulated savings.

A bear market with a few years left before your retirement could hinder your plans in due course to leave your job. At this point, retirement portfolios should mainly concentrate on nice, dividend-paying stocks and investment bonds to generate both conservative growth and revenue streams.

One guideline recommends that investors should reduce their age from 110 to calculate how much to invest in stocks. For example, a 70-year-old will target the distribution of 40% stocks and 60% bonds.

You might try to increase your chance for higher returns if you are behind on your savings. Since this technique is not always effective, it is inconsistent. Investors who take a risky approach often make the situation worse by betting on riskier assets at the wrong moment. 

Some higher risk can be acceptable depending on your goals and appetite, but taking on too much risk can be troublesome. Increasing equity allocations by 15% may be acceptable in this case for the risk-tolerant.

Construct a total return portfolio

One simple way to generate retirement income is to build a portfolio of index funds and stocks (or consult with a financial advisor who would do this) (or work with a financial advisor who does this).

The portfolio is structured to achieve a decent long-term rate of return, and along the way, you adopt a specified set of withdrawal rate criteria that will usually allow you to take out 4-7% a year, and in certain years, raise your withdrawal for inflation.

The idea behind “total return” is that you are seeking a 10 to 20-year average annual return that matches or outpaces your withdrawal rate. Although you are projecting a long-term average, your returns will diverge a little from that average in any one year.

In order to pursue this form of investment strategy, you must retain a diversified portfolio regardless of the ups and downs of the market.

You take withdrawals utilizing what is known as a systematic withdrawal plan. Be wary of how you project your potential outcomes when regular withdrawals take place in retirement, a series of market returns may influence your outcome.

Return investment strategies have many variants such as time segmentation and asset-liability matching which are employed to meet approaching cash flow needs, and later-stage growth-oriented investments are used to finance future financing needs.

The total return strategy is best used by seasoned investors, those who want to handle their money and have a history of making fair, balanced choices, or by having a consultant who uses this strategy. When done properly, one of the best retirement plans you can make is a total return portfolio.

Use retirement income funds

Retirement income funds are a specialized form of financial investment. They simulate your investment portfolio by automatically investing your assets into a number of other mutual funds.

The returns are provided in the form of monthly income to be deposited into your account. The aim of these funds is to provide a comprehensive package that accomplishes a specific objective.

Some funds have the goal of generating higher monthly income and can use a certain principal to meet their payment goals. Other funds have a lower monthly income amount paired with the purpose of maintaining the principal. 

In a retirement income fund, you keep ownership of your principal and have access to your money at any moment. Of course, if you deduct any of your principal, your future monthly income will be diminished.

Open an IRA

In order to build your nest eggs, consider setting up an individual retirement account (IRA). Two choices are available for you: A traditional IRA could be appropriate depending on your income, and whether you or your spouse have a retirement plan in the workplace.

Contributions to a Traditional IRA can be tax-deferred, and before you make withdrawals after retirement, investment earnings have the potential to rise tax-deferred. A Roth IRA could be a good option for you if you follow the phased out income limits, that is based on your federal tax filing record.

They are funded with after-tax contributions, but once you turn age 59½, qualified distributions are tax-free if certain holding period conditions are met.

Leverage immediate annuities

All annuities function like insurance plans rather than savings. The goal is to generate the income you will need in your retirement.

An immediate annuity is ideal for a future income. You can earn guaranteed income for life in exchange for a lump-sum payment (or for some other agreed upon time frame). The guarantee is as good as the insurance firm that offers it.

There are fixed immediate annuities and also variable immediate annuities. Some promise income that will rise with inflation, but that means you’ll start out earning a lower monthly sum.

You can also select the term of the annuity, like a 10-year payout, a joint life payout (suitable if you're married and expect income for either one of you that may be long-lived), or even a single life payout.

Immediate annuities can be a reasonable option for people without many other sources of steady income, people who appear to be over-spenders, and individuals with long life expectancies (so they can invest a lump sum far too easily, and then little remains).

Buy bonds

When you own a bond you lend your funds to either the government, the company, or the municipality. The borrower promises to pay you interest for a fixed period of time, and the balance will be returned to you when the bond matures. Interest income or income you earn from a bond (or a bond fund) may be a stable source of retirement income.

Bonds have quality ratings that give you an opinion of the financial quality of the bond issuer. There are short-term, medium-term, and long-term bonds. There are also bonds with flexible interest rates, known as floating rate bonds, and also high-yield bonds, which offer higher coupon rates despite having lower quality ratings.

Bonds can be bought as a bond mutual fund or as a bond exchange-traded fund or specific bonds can also be purchased.

In retirement, individual bonds may be considered to form a maturity bond ladder to fulfill the potential cash flow requirements. This method of investment is also referred to as the matching of asset-liability or time segmentation.

The principal value of bonds depends on interest rates. In an increasing interest rate setting, bond prices will go down. If you keep the bond until maturity, the principal will not change. If you are buying a bond fund for living expenses, you should also watch the inflation rate.

Buy the bonds for the income they earn or the secured principal that you will receive when they mature and do not hope to receive high returns or to make a capital appreciation benefit.

Rental real estate

Rental property can provide a stable income but must be managed. There are costs when you own real estate, that you cannot expect.

Until you purchase a rental property, you can measure all the costs you will incur over the time you own the property. Also, consider vacancy rates since your property cannot be rented 100% of the time.

Investment estate is a business, not an offer to get-rich-quick. For those with real estate knowledge or those who want to spend time on business real estate rental, a substantial retirement investment can be produced.

If you're unsure where to begin, consider reading real estate investment books, talking to seasoned investors, and joining a real estate investment community.

Don't go ahead and try investing in real estate without making your own research. People get on the real estate trend simply because they met a friend or neighbor who was doing really well with real estate.

Your friend or neighbor may have the expertise or experience you don't have.  Going into an investment just because someone has been good with it is not the best reason to do it.

Variable annuity with a lifetime income rider

A variable annuity is not the same kind of savings as an immediate annuity. In a variable annuity, the money goes to the portfolio of investments you want. You share in the profits and losses of those investments, but you can add guarantees, called riders, for an extra fee.

Think of a rider like a porch that you might not need, but it's there to shield you in the worst-case situation.

Riders that provide income have several terms, such as living benefit riders, assured withdrawal benefits, lifelong minimum income riders, etc. Each of them has a different formula that specifies the type of guarantee to be given.

Variable annuities are complicated, and many of the people who sell them don't have a clear understanding of what the plan does or doesn't do. Riders have fees and also have variable annuities, with average fees of around 3-4% per year.

That means making any money that the investment needs to pay back the fees, plus some extra.

An annuity is a product of insurance. There is a need for thoughtful preparation to decide if you should ensure any of your money. If the answer is yes, then you need to find out what account you need to buy the annuity in (an IRA or using non-retirement money), how the money will be taxed when you use it, and what happens to the annuity when you die.

Proper preparation should be undertaken prior to the purchase of variable annuities.

Unfortunately, all too often, an annuity is bought because someone had cash and a salesperson recommended that they put their cash into a variable annuity plan. This is not really what financial planning.

Keep some safe investments

You always want to keep a part of your retirement investment in secure alternatives. The primary objective of any healthy investment is to maintain what you have rather than produce a high level of current income.

All retirees should have a rainy day fund (an emergency fund). This account should not be used as an asset available for the development of retirement income. It's there as a financial cushion; something to turn to for unexpected expenses that may occur in retirement.

Also, if you're not sure what to do about your money, place it in a safe way to build while you're taking the time to make an informed decision.

Most people hurry to spend their money and they feel like it shouldn't be sitting in the bank for too long. They end up taking a quick move, which is usually a bad idea.

It takes time to make careful, well-informed investment decisions. When you're educating yourself or interviewing your advisors, it's fine to park your money in a safe spot. No trustworthy professional is trying to challenge you to make a fast investment decision.

If you feel under pressure, you might not be working with somebody who has your best interest at heart.

Income-producing closed-end funds

The number of closed-end funds is intended to earn monthly or quarterly income. This income can derive from interest, dividends call protected, or, in some cases, from the return of principal.

Each fund has a different mission; some shareholdings, others own bonds, some write covered calls for income generation, some use a so-called dividend capture strategy. Before investing, make sure to do your homework.

Many closed-end funds use leverage, meaning that they borrow from investments in the fund to buy additional income-producing securities and are thus able to pay higher returns. Using leverage brings additional risk. Expect that the key benefit of all closed-end funds is very unpredictable.

For a part of their retirement money, seasoned investors can find closed-end funds to be a suitable investment. By using a portfolio manager that specializes in closed-end funds, less experienced investors can avoid them or own them.

Dividends and dividend income funds

You can create a dividend income fund to automatically own and manage dividend-paying stocks for you. Dividends can generate stable retirement income that can increase each year. However, dividends can also be diminished or stopped completely.

Most publicly traded companies generate what they call ‘qualified dividends,' which ensures that dividends are taxed at a lower tax rate than regular income or interest income.

For this purpose, it may be most tax-efficient to keep funds or securities that generate eligible dividends in non-retirement accounts (i.e. not within the IRA, Roth IRA, 401(k), etc.)

Please be careful of dividend-paying stocks or funds with returns that are much higher than the average rate tends to be. Strong returns are often followed by additional risks. If anything pays a substantially higher return, it does so to reward you for taking more risk. Don't spend without knowing the risk you're taking.

Real Estate Investment Trusts (REITs)

A Real Estate Investment Trusts aka (REIT) is like a mutual fund that controls real estate. A team of professionals manages the land, collects rent, pays expenses, collects management fees, and distributes the remaining profits to the investor.

REITs can specialize in one form of property, such as residential buildings, office buildings, or resorts. 

There are non-publicly traded REITs, usually sold by a broker or registered agent who gets a commission, and also publicly-traded REITs that trade on a stock exchange and can be purchased by anyone who has a brokerage account.

REITs may be an effective retirement investment when used as part of a diversified portfolio. Due to the tax features of the income generated by the REITs, it might be better to keep this form of investment in a tax-deferred retirement account like the IRA. 

Take advantage of catch-up contributions if you are age 50 or older

One main reason why it is very important to start saving early is that there are minimal annual contributions to IRAs and 401(k) programs. The good news, huh?

As of the calendar year in which you hit the age of 50, you are entitled to meet the usual catch-up contribution limits for IRAs and 401(k)s. So if you haven't been able to accumulate as much as you would have liked over the years, catch-up contributions will help improve your retirement accounts.

Automate your savings

You've likely heard the expression “pay yourself first.” Make your retirement savings automatic every month and you'll have the ability to build your nest egg without having to worry about it. 

Find an automated funding service that allows you to automate your contributions.

Rein in spending

Carefully examine your expense budget. Perhaps you want to forgo conventional auto insurance in favor of choosing a cheaper rates package or by taking your lunch from home instead of purchasing it. Explore places to reduce your spending so that you will have more to save and invest.

Consider delaying Social Security as you get closer to retirement

For every year you can delay receiving a Social Security payment before you reach age 70, you can increase the amount you receive in the future.

Because 62 is the earliest age you can begin receiving benefits, each year you wait means higher monthly payments. Making a year's worth of savings can be a huge boost. It will increase survivor benefits for your spouse.

Putting money aside for retirement is the first move in the process.  Get a clear handle on retirement accounts, and figure out how to maximize contributions. Retirees with insufficient savings regret spending too little.

Making the effort now will reduce your retirement concerns and make your retirement more enjoyable.

Consult a Financial Advisor

Money management is a field of expertise for fairly few individuals. Consulting a financial advisor or planner could be a prudent course of action for those seeking professional oversight of their personal situation.

A successful planner ensures that the retirement portfolio retains a risk-appropriate distribution of assets and, in some situations, can provide guidance on wider estate planning issues as well.

Planners charge an average of about 1% of the total assets handled annually for their services. It is usually advisable to select a planner who is paid on the basis of the size of the controlled portfolio rather than someone who receives commissions on the basis of the goods they sell.

If you got to the end of this article, congratulations! Learn what you can, and note, it makes the most sense to select your retirement fund as part of the overall investment portfolio. Investments are better selected so that they do not function together as individual solutions. All choices raised can be mixed and balanced and used as part of a strategy.

This website does not offer tax, investment, or financial services or guidance. The details shall be provided without taking into account the investment goals, the risk profile, or the financial circumstances of any individual investor and may not be sufficient for all investors. Past success is not predictive of potential outcomes.

Investing entails risk, including the potential loss of principal.