Today we have a very special guest contributor, Andrew Altman, editor of the financial site, SlickBucks.com. Andrew also dedicates his time to helping novice investors learn how to properly plan for retirement. A big thanks to Andrew for contributing to GradMoney, and be sure to check out the links in his biography below.
Retirement planning is an important financial endeavor which every working individual should consider early on in their career. Not so much information is available for investing the dollars you stash away from every paycheck to your retirement account. Save and save some more. This is the most common advice dished out to anyone funding a 401(K) plan.
Many funds exist in the market today (over 11.000) where you can invest your retirement savings for a healthy profit. An ideal fund should be inexpensive to hold, diverse, and have the potential to invest in high-yielding stocks to generate more income for retirees.
Additionally, they offer tax free (equity funds) or tax efficient (debt funds) returns to the soon-to-be retirees. We recommend that you choose one that meets your long-term goals and has most of the qualities we mentioned before. Once you have your goals established, it’s time to hit the ground running and start looking for funds that match your search criteria.
The internal cost of a mutual fund referred to as the expense ratio, makes it to the top of our list and for good reasons.
Suppose you have the option of investing $2000 in a fund that has an annual expense ratio of 1% or a similar amount in a fund that has an expense ratio of 0.5%. The second option that has lower expenses would be the better pick. The 0.5% difference translates to an extra $500 in your pocket every year. Which is quite a tidy sum if you ask me. An extra $500 can add up to a substantial amount over the course of a twenty year retirement plan.
Studies have shown that funds with lower expenses blow away the competition that has higher expenses. Index funds are a good example of low cost funds that are known to deliver solid performance. A diverse portfolio using index funds can act as a strong foundation for low-cost retirement plans.
The Auto-Pilot Tip
Large mutual fund companies have developed packaged solutions that include a series of funds targeted just for retirement. Commonly referred to as retirement income funds. They are specifically tailor-made to generate monthly income for you in your retirement. You can opt for a retirement income fund that pays a high amount of monthly income though you can expect your principal amount to stay flat or gradually go down.
Alternatively, you can opt for lower monthly income that will help keep the value of your retirement fund in check. With an $100,000 investment, you can expect an annual income of 3-8% which is not less than $3,000.
Dividend income funds and retirement income funds are often confused but are two different investment plans. A dividend income fund prefers stocks that pay dividends. However, income funds offer a suitable mix of stocks and bonds for you to choose from. The more capital you invest with retirement income funds, the more income you can earn from your portfolio and vice versa. The dividend income fund mostly acts as a building block of a retirement portfolio. However, an income fund can serve as a complete portfolio on its own.
Do You Have A Definitive Investment Strategy In Place?
In retirement, it’s important to apply a thoughtful process when making some major financial decisions. You need to be sure of which accounts you’ll be able to withdraw from and after how many years.
A financial advisor is recommended to guide you on this. The worst-case scenario of not having a solid plan in place is having to sell your retirement fund when the market is under-performing. Always use a well-documented set of withdrawal rules that match your future financial goals to manage your retirement portfolio. Work with an experienced planner who understands that investing for monthly income requires a different approach.
An interesting way to do this is thinking of your investments in time segments. For example, you will probably invest money you’ll need in the next three years differently from the money you won’t need for twenty years or more.
The devil is in the detail. So, before you settle on any fund to invest your retirement savings, make a detailed retirement plan and take your time to understand what is actually being presented to you.
Decisions such as tax planning, social security application, or when to take your pensionable income are also very important. A majority of retirees give these a back seat and only concentrate on finding a good mutual fund.
Surprisingly, though, if all these decisions are made with a sober mind they can prove to be more valuable than picking what you consider to be a good mutual fund. Plan your retirement first and choosing a fund for your retirement savings can be the icing on the cake.
About the Author
Andrew Altman is the editor of financial website SlickBucks.com which is dedicated to helping beginner investors make better decisions and help them gain the kind of financial wealth they desire.