Life in retirement can be quite costly. As was revealed in our ‘Investment Strategies for Retirement’ presentation, the average American is expected to live to 78.6 years. That means that if you retire at 65, you might spend approximately 13.6 years living off of your retirement fund. And with inflation driving prices up, it’s important to find investment strategies that can account for that length of time, and what cost of living might be like when you get there.
To help you build your retirement fund accordingly, we’ve listed a few different investment vehicles you can look into.
Certificates of Deposit
The SEC defines certificates of deposit (CDs) as savings accounts that offer high-interest rates in exchange for the right to hold your money for a fixed term. The longer that term is, the more you earn. This makes CDs effective tools for protecting your funds for retirement, so long as what you earn via interest outpaces inflation.
It's important to recognize that CDs will charge penalty fees for early withdrawals. If the purpose of the account is to safeguard capital for the future however, this shouldn't become an issue.
Many investors may want assets that actively earn income, such as stocks. However, investing in individual stocks as an amateur can be risky –– not to mention extraordinarily time-consuming. A more reasonable choice, in many cases, is to invest in a mutual fund.
A mutual fund is a collection of stocks, bonds, and/or other assets that is managed by a third party. It is designed such that any well-performing assets it contains can compensate for any losses due to individual asset crashes, ultimately reducing the risk of overall loss. And the only decisions you need to make as an investor are when to buy in and when to pull your money (and hopefully a healthy return) out.
If you have a set plan for when you will retire, you can also purchase a target-date fund. Forbes' guide to these funds explains that they effectively structure their asset allocation around a specific time frame. Target-date funds will invest in more aggressive assets to generate high returns, then switch to more conservative assets closer to the end of the time frame in order to conserve gains and maintain slower, steadier growth.
Mutual funds do have one big disadvantage: The professionals managing your funds may charge high fees for their services, regardless of whether the fund does well or not. If you don’t want these fees eating into your profits, you can opt instead for a passively managed alternative, such as an exchange-traded fund (ETF).
Rather than having a professional select which assets to invest in, ETFs invest based on indexes. Simply put, ETFs track the highs and lows of underlying assets and distribute profits to shareholders.
In many cases, ETFs are designed a investments in stocks. However, there are also some that track the value of commodities like gold or even cryptocurrency as well. Wealthsimple’s overview of gold ETFs explains that these funds bundle together investments in physical gold, gold futures, and gold mining shares. This is designed to capitalize on the steady, stable growth gold typically exhibits over time. Crypto ETFs, on the other hand, may bundle numerous cryptocurrencies together more in the hopes of securing big gains from one or the other.
The stock and gold routes are more traditional for a retirement fund, but the point is that there are different options in this passive investment category.
If you have a larger sum to invest, you can further grow your retirement fund –– and have your earnings dispersed through fixed intervals –– by buying an annuity. In our article ‘What is an Annuity’ we defined these options as insurance contracts that entitle buyers to regular sums of payment. As an example, you can spend a lump sum of $100,000 to buy an annuity with a 4% return. Your fund will grow tax-deferred. Then, once you’re retired, your provider will give you annual payments of $13,250 for the next several years.
This is a good option if you want a clearer picture of how much you'll ultimately earn. However, if you want to boost the value of your investment, you can also invest in a variable annuity, which allows you to contribute additional premiums over the course of the arrangement.
As a final note, remember that it's ultimately best to invest in multiple ways at once. You may even try all of the above when building a diverse retirement plan. Whatever you decide though, make sure that it's based on thorough analysis and consideration of your own financial circumstances and future plans.
Diversification and asset allocation strategies do not assure profit or protect against loss. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment advisory services offered through Cambridge Investment Research Advisors, a Registered Investment Advisor. TechGirl Financial™ and Cambridge Investment Research, Inc., are not affiliated companies.