Everyone knows they should be saving for retirement. But not everyone knows how they should be saving for retirement. Why is it important to save strategically? As prices rise and people live longer, those heading into retirement need to have a large cushion. According to Fox Business, “Financial experts now advise saving enough to finance at least 25 years of retirement, which may require $2 million or more. Most people aren’t coming anywhere close to saving that much.” So what do you do? Save money, invest regularly, and invest more aggressively. Here are a few suggestions to get you on the path to a comfortable retirement.
1. Don’t rely on a savings account
“If you feel that the only safe place for your money is in a bank, you’re actually taking a great risk because inflation erodes the purchasing power of your money. Although many people contribute to retirement accounts, they never invest beyond that, sticking with what they perceive to be the safest option in order to avoid loss,” writes Nerd Wallet. If you have savings, invest it. It will appreciate over time and at least keep pace with inflation, or even better, grow at a greater rate than inflation. None of that will happen if you just have your money sitting in savings.
2. Try to avoid fixed-income bonds
If you’re opting for a low-risk portfolio that is heavy on fixed-income bonds and money market funds, it may be time to reconsider. Yes, they’re stable investments — however, you’re often not going to see a return that’s nearly as good as what you’d see with the S&P 500, per Fox Business.
Still not convinced that you should take a risk? By relying on fixed-income securities, you could actually be condemning yourself to an extra decade or two of work. That’s how much of a difference your investments can make. Having said that, Fox Business writes that there are also some exceptions to that rule. For example, consumer notes are stable, high-yield fixed income securities, which often can see higher returns, and are known to outperform most bond indices with higher returns and lower volatility.
3. You need stocks
As mentioned earlier, taking risks is important. “Even if you are spooked by the stock market’s volatility, you’ll need to invest in stocks to have a decent chance of reaching the higher end of that return spectrum,” according to Daily Finance. Over the long run, the stock market has provided average returns of around 10 percent annually. Some years are higher, and some years (unfortunately) are lower. But if you’re dealing with a timeframe in decades, your average returns become much more meaningful than yearly ups and downs.
Looking for individual securities that closely track the major indexes? Look at the SPDR Dow Jones Industrial Average ETF, S&P Depository Receipts, and Fidelity Nasdaq Composite Index, per Daily Finance. You can (and should) also consider foreign stocks/global funds. It gives you more options, but tread carefully — it also comes with increased risks, according to How Stuff Works. The plus side to foreign stocks/global funds is that developing countries offer the greatest potential for growth. The negative? Even if you stick with well-established financial systems, “an investment in foreign stocks means the risk of currency fluctuations. If you buy a German stock, for example, and the Euro rises against the dollar, your investment will be worth more. But if the Euro sinks relative to the dollar, your investment return is decreased,” writes How Stuff Works.
4. Use your age to help form an investment strategy
Using your age will help determine how aggressively you should actually be saving. USA Today suggests that those who fit into the Generation Y category (people born from 1982 through the early 2000s) make bold investments. What do you really have to lose? Try to invest anywhere form 70 percent to 100 percent of your 401(k) in stock funds. A moderately aggressive investor should invest 45 percent in large-company stocks, 15 percent in small-company stocks, 20 percent in international funds, 15 percent in bonds, and 5 percent in a money market or stable value fund says Dean Kohmann, vice president, 401(k) plan services for Charles Schwab, according to USA Today.
However, Chris Jones, chief investment officer of Financial Engines, told USA Today that young investors should put between 85 percent to 90 percent of their money in stocks, while investing 10 percent to 15 percent in bond funds. His recommendation for stock allocation is to invest 40 to 45 percent of the portfolio on large-company stocks, around 30 percent to international stock funds, and invest the remaining 15 to 20 percent in small or midsize company stocks.
Okay, Generation X (those born between 1965 and 1981.) It’s your turn. If you still plan to work at least 15 more years, try to have about 75 percent of your portfolio in stock funds. However, if you’re an older member of Generation X, move toward a mix of 60 percent stocks and 40 percent bonds, according to USA Today. Looking for how to specifically allocate your 60-40 portfolio? Try putting 35 percent in large-company stocks, 10 percent in small company stocks, 15 percent to international stock funds, 35 percent in bond funds and 5 percent in stable value or money market funds.
Finally, this is for the Baby Boomers. Even if you’re in your 50s, don’t avoid the stock market entirely. Instead, opt for 65 to 70 percent of your portfolio in stocks, with 35 to 40 percent in large-company funds, 25 to 30 percent in international funds, 15 to 20 percent in small or mid-cap stocks, and 15 to 20 percent in bond funds, writes USA Today. But, that’s simply an average. Other sources of income also play a role — if you will also be receiving a pension, you can afford to be a little bit more aggressive than someone relying only on savings.