When it comes to determining the best investment strategies for your money, the first thing to consider is why you are investing to begin with. The majority of individuals are investing the money they make now in order to secure their golden years — when they finally decide to give up the rat race and do the things they’ve always wanted to do.
The idea of retirement differs from person to person. Some people want to simply sit back and enjoy the fruits of their labor, others want to jet set and see the world, and some of us want to start businesses of our own. Whatever constitutes your ideal retirement, you need to plan now in order to see it happen. We’ve heard it said time and again that investing the money you make now in a way that will maximize your return when you’re ready for retirement is one of the best ways to realize your goal.
How Much Retirement Income?
So how much retirement income will you need? That too will vary for everyone. However, before you start dumping your money into blue chip stocks, you should begin considering what your needs will be when you enter into retirement. I would start out by answering these questions:
1. When do you plan to retire? When are you “retiring”? How many years will you need to cover basic living expenses? Again, I use quotes when I reference retirement because it means different things to different folks, and may therefore mean variable amount levels depending on the individual.
2. What lifestyle do you want to live? What level of income will be required to support the lifestyle you want to live?
3. Can you become debt free faster? How much of your available income in your golden years will be devoted to paying off old debts? Ideally, you won’t have any more debt upon retirement, but this isn’t the case for everyone.
4. Can you lower your health care costs? Rarely do people plan for the health issues they will face after retirement.
The idea behind planning for retirement is to ensure that you at least maintain the level of income you are currently earning in order to support the lifestyle you want. Of course, you need to think of this income in terms of tomorrow’s money due to inflation. One dollar today certainly won’t buy as much, twenty years down the road.
Image by Ethan Bloch @ Flickr
What’s Your Retirement Income Strategy?
Beyond social security income, what other income are you thinking of relying on in your later years? For many, these would be their retirement savings and investments. One of the most important concepts to consider when devising your investment strategy is the concept of diversification. Remember the adage about resisting the urge to put all your eggs in one basket. True diversification allows you to spread your money over several different types of investment products such as foreign vs domestic equities, bonds, real estate, precious metals (gold ETF investing anyone?) and cash.
The Traditional, Long-Term Investment Route
For your long term portfolio, it is important to think about periodically rebalancing it to take into account the success or failure of certain asset classes. The idea behind this is to keep your retirement account growing steadily over time. Periodic downswings should be expected in any stock or mutual fund, but consistent loss of value may require you to rethink a particular investment’s role in your portfolio.
Never forget to take advantage of your employer’s 401(k) plan (or other employee sponsored retirement plan). The nice thing about company-sponsored 401(k)s is that in addition to your regular contributions, your employer will usually drop some dollars into your retirement bucket as well. This is free money. Not only is this tax efficient investing, but it’s also a gift from your company, meaning that you don’t have to do anything to get it other than to participate in the plan. Your 401(k) plan will automatically invest your contributions in common stock or mutual funds (based on your selections), and you are free to reallocate your contributions into any of the available funds in your plan.
Out of The Box Options For Your Retirement
So there needs to be a balance between aggressive investments (risky, with the potential for big returns) and conservative investments (low to no risk, with lower return). We are taught that balance will allow your money to grow well over the long-term and protect your portfolio against huge losses when the market enters into a slump. But is this enough?
Because of the uncertainties we’ve been experiencing over the past decade, when the financial crisis pretty much decimated all manner of investments, particularly those buy and hold investment accounts we all thought were “safe” (think: 401(k)s and IRAs), people have been seriously rethinking their situation. I’ll have to admit that even I had to shift the way I thought about the future when the financial crisis hit and when I realized just how unpredictable things can get. Even the best laid, well diversified plans can get derailed.
The truth is, I really haven’t covered all the bases. True, using asset allocation, diversification and rebalancing are great strategies to approach retirement but there are never any guarantees. Realizing this, I decided to look into other possible ways to address my retirement needs. Here are some alternative ideas I’ve considered (and have started executing):
1. Small Business – Look into establishing an income channel by investigating entrepreneurial projects. How about investing in your own business ideas?
2. Active Investing / Trading – This shouldn’t be the lynch pin of your investment plan, but for a small portion of your portfolio, you may decide to become a little more adventurous. Who knows, you may find that with experience, you may develop some skills in this area that may allow you to grow your portfolio profits in a larger way. You could decide to allocate a small portion of your portfolio towards higher returns with higher risk.
3. Freelancing – You may think about something you enjoy doing and seeing if it’s something you can monetize.
4. Landlording / Real Estate Investing – How about investing in rental properties, especially now that the property market is in decline? There could be opportunities here that could potentially cover your income needs in the future, if you decide to pursue them now!
5. Angel Investing – This may seem far-fetched to some people, but it’s becoming more and more of a reality for those who are interested in investing in small businesses and startups. Sites like LendingClub.com and MicroVentures.com help facilitate this kind of investing. Check out our Lending Club investment discussion here and our MicroVentures.com review here for additional information.
What’s great about these activities is that you can claim them as your own and they can be done on a flexible schedule so that you can easily incorporate them into your retirement plan!
A Real Life Case Study: Here’s one case study straight out of my own experience. I have some family friends who have established a business running a couple of assisted living facilities. After they retired from their careers, they figured that as empty nesters, they could turn their home into a retirement home. Nowadays, they’re enjoying their golden years with a healthy cash flow and helping other older folks to boot.
So what type of retirement are you envisioning for yourself?
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{ 13 comments… read them below or add one }
For my money, the best play for retirement has been investing in rental property. The tenants have been paying off the mortgages and when I retire, just two properties will provide more income than the (uncertain) Social Security check I am supposed to receive.
Most of my income will come from a mix of property rental and dividends. A small amount from interest. With a 40-50 year time horizon, allocating more than near term needs to assets which don’t have at lest the potential to grow to combat inflation is far to risky.
There is no meaningful equivalent to SS here.
I’m planning to tread water until about age 65, at which point I’ll hit the lotto jackpot. Spending $1000 each week on those tickets is bound to pay off at some point …
Planning for a comfortable retirement has also become an imperative in this modern unpredictable world we live in.
1. Not to retire in North America
2. To save enough money as a bare minimum, I’ve calculated $1 million before inflation. I’m aiming for $3 million,
3. Keep expenses low and just bank the rest.
4. Keep trying to find passive side income.. and by passive I mean freelancing opportunities such as writing
I live in a rural area, and I really love the small business idea for retirement.
I know people who have started a B+B or started selling items they’ve raised or grown like eggs or Xmas trees, etc. I wouldn’t want it to be my sole source of retirement because mobility does go down over time, but it would be nice to avoid tapping into the 401K and seeing if I could survive on a side income.
Some great ideas here!
@Kosmo, thanks for the chuckle! Well, I did, anyway!! 🙂
@FB, you are right, I failed to include the “not retire in North America” point in my post. With health costs here just about ready to bankrupt you, it may be a good idea to explore retirement elsewhere. I have family elsewhere (in 2 other countries) so it could work. But I’ve also explored just moving from the SF Bay Area to other states. I joked before how many Californians look upon their house as their retirement plan. Unload the real estate then settle elsewhere….
The basic tenets of finance ring even louder during retirement: cut costs, live under budget, make sure you’ve got cash flow.
Regarding social security, I think it’s wise to invest with the assumption that it won’t be there when you retire. If it is there, then you’ve estimate conservatively and should be in great shape. If it isn’t there, then you’ve planned for it and should be OK.
SS will likely be around in some form, but if they continue to ratchet up the retirement ages, a lot of people will be dead (or many years into retirement) before they can tap the benefits.
Retirement is one of my favorite topics. I used to think of retirement as a sad time for an individual until my mother retired and she made retirement look good. With a generous pension, Social Security, and solid investments, she retired early and will not have to work again. She has travelled internationally and domestically since she retired and has seen parts of world that she did not have time to see when she was working. She owes a lot of this to my father who invested early and used the time value of money—he also made sure we had no real debt and lived under our means. I plan to follow a similar plan. I want to retire early so I want to have alternative streams of income in addition to my job. Real estate is one of my alternative forms, but I want to diversify by getting into a small business next and want to take my blog from a hobby to generating income. I have even thought about renting out a room in my house, but my wife will not let me.
I will hit it rich in penny stocks. I will buy a stock that makes gold out of dirt and make $600,000 on my investment at which time i will retire and live a comfortable life with my 7 wives in Utah.
I think that retirement should be redefined as a time when you finally do whatever you want! Once you think that way, you can finally agree why those years are described as “golden”. But here’s the thing — if you’re doing whatever you want now, then I suppose you can call yourself “retired” so to speak… 😀
@Ray – good luck on that. 😉
Annuity with life insurance for lifetime income, estate planning, annuity with adjusted income through the markets, and papered bonds. These are the best strategies for a tax-free savings account.
Glad you mentioned this first—retirement differs from person to person. I’m nearing retirement and weighing all my options before that day arrives. I have friends who consider retiring outside the US claiming they if they could stretch dollars abroad they’re better of that way. I think there’s more to that though. Both my parents are happily retired at Alden Place in Lebanon, PA and have not experienced some big financial obstacles since. My parents have always been careful in how they spend their money more than earning it.