Stop procrastinating and start investing for retirement today
A recent study by the US Census Bureau found that most people are not prepared for retirement. Another report found that most Americans cannot afford a $400 emergency at a given time while nearly half of families did not have a retirement account at all. This is a dire scenario that is common to many people around the world. The paradox is that most young people ignore investing for their retirement. They believe that retirement is too far ahead for them to have to worry about it.
In developed countries, the average retirement age is about 65 years while the life expectancy rate around 79 years. This means that after retirement, people continue to live on average for 10 more years. During this time, the costs of living tend to increase especially due to housing and healthcare. These may count as the main reasons behind for the rise in suicide rates among the elderly in many countries.
These scenarios highlight the importance of retirement planning. Studies have shown that people who start investing for retirement early in their careers do better in retirement than those who postpone it. They also live happier lives during their younger years. For example, if you start saving just $50 a month towards your retirement when you are 25, you will have a principal of $24,000 when you retire at 65. If you put this money in an interest-bearing account, you will have more than $40,000 by using the concept of compound interest. On the other hand, if you start saving this money when you are 40 years old, you will have just $9000. Other than this, there are many other benefits for retirement planning and investing. They are:
Live longer: investing in retirement helps reduce the probability of stress-related diseases like diabetes, heart disease and depression.
Live happier: knowing that you have enough money when you retire will help you live a happier life.
Family stability: since finances are the leading causes of divorces and marital problems, retirement planning can help you avoid family issues.
Tax advantages: most retirement saving plans do not attract taxes.
There are many ways you can start investing for retirement. In many countries, it is required by law for employers to deduct some of the employees'employees funds and deposit it to a retirement account. In the United States, employers deposit this money in an account commonly known as the 401K. In the United Kingdom, the Personal Pension Plan (PPP) scheme allows people to invest for their retirement in an efficient way. A good starting point is to top up these retirement plans with your own cash. For example, on top of the employer-mandated 401K, you can set aside a certain percentage of your salary to go to these funds. The benefit of these plans is that they are safer than other investment vehicles. They also do not attract capital gains taxes. However, a common problem with these plans is that they attract low-interest rates.
After saving your retirement money in these plans, there are other ways that can help you achieve success during your retirement. These are:
Investing in a fixed income
Fixed income refers to investments that have fixed rates of return. The return is paid at certain durations such as monthly, quarterly, and even annually. There are a number of types of fixed asset investments. These are:
Bonds: this is money which you loan to a company, the government, a government agency, or a municipality. After providing the capital, you will receive interest at the durations above. If you hold the bond to maturity, you will then receive your principal amount.
Mortgage-backed securities: this is a security which derives its cash flow from the underlying pool of mortgages. These securities are categorized into mortgage pass-through securities, collateralized mortgage obligations, and stripped mortgage-backed securities.
Commercial backed securities: These are securities similar to the MBS. The difference is that they derive their income from a pool of commercial properties.
Asset-backed securities: These are securities that are backed by other assets. Some of these assets are commodities like gold, land and stocks.
Preferred stocks: these are investments in companies that are similar to stocks. However, they are more advanced than common stocks. Preferred stockholders receive dividends at a par value.
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Other than government and commercial bonds, the other securities are more complicated and are mostly recommended to sophisticated investors.
Real estate investments
Another way you can invest in for your retirement is in real estate. In real estate, the idea is to build or buy houses. After this, you can lease them and receive rental money every month or every quarter. The challenge of real estate investments is that they require a lot of money to start with. Nonetheless, you can solve this situation by pooling funds together with a few friends. Alternatively, you can use the many online platforms that allow crowdfunding for real estate investments.
The benefit of real estate investments for retirement is that the cash flow will always be there especially if you build them in high-demand areas. Another benefit is that the value of real estate investments will always grow as the population and economic growth increases.
Fixed income and real estate investments are important because they are usually seen as being safer investments.
Another asset class you can invest in is stocks. Stocks are shares of publicly listed companies. When you invest in stocks, you benefit from three things. First, you benefit from capital gains. This is when the value of the stock that you own moves up. For example, when Facebook went public in 2013, its stock was priced at $38 a share. In October 2018, the stock was at $150. Therefore, if you bought 10 shares when it went public, you would have spent $380. In October 2018, the value of your shareholding would be worth $1500.
Second, they derive their income from the dividends. When a company generates additional cash flow, instead of putting it in the balance sheet, it can return the funds to investors. For example, if you own 1000 shares of a company like Apple. If the company pays a dividend of $1 per share, then you will receive a payout of $1,000 from your investment.
Finally, stocks can reward you by share buybacks. This is a situation where a company decides to buy back its stock instead of paying a dividend. As an investor, you benefit by a reduced share count which makes your shareholding more valuable.
There are four types of stocks investments:
Value stocks: these are companies whose value has been ignored by the market. A company can be ignored because of the sector it is in. It could also be because of the weak earnings or guidance. The purpose of investing in value stocks is to bet in the recovery of the company. A good example of a value stock is IBM.
Income stocks: these are mature companies that have a moat in their industry and those that reward their shareholders with regular dividends and buybacks. Investors in these companies don’t anticipate a lot of growth. Examples of income stocks are General Motors, Coca-Cola, and McDonald's.
Growth: these are relatively new companies that investors believe will change the world. Examples of these companies are Nvidia, Facebook and Amazon.
Speculative stocks: these are stocks that are priced low. They are commonly known as penny stocks. Their stock prices tend to move up and down by double digits.
For your retirement, it is recommended that you take the time to create a portfolio that includes companies in all 4 groups.
The value stocks will be important for you if investors start focusing on them. Historically, investors tend to exit stocks that underperform. If they are well-managed companies, they tend to recover, and investors flock back. A good example of a value stock is Microsoft. Before Satya Nadella became the CEO, the company’s stock had suffered because of poor execution by his predecessor. After changing the company’s stricture, the company’s stock doubled in less than three years.
Income stocks, on the other hand, are great because they provide regular income in form of dividends. For your retirement, it is recommended that you reinvest the dividends. Well-run dividend companies will, therefore, therefore provide you with both dividends and capital appreciation. A good example of a dividend stock is AT&T which gives a yield of 6%.
Growth stocks should form a part of your retirement portfolio because of the returns they can offer. The Facebook example above provides a good example of how these companies can help your portfolio. Other growth stocks that have done well and doubled investors’ money after their IPO are Square, Nvidia, Netflix, and Alibaba.
Before you invest in these companies, it is important for you to take a lot of time doing the research. For example, for value stocks, you need to ask yourself the reason why the stocks are undervalued. After this, you should research on the catalyst that will push the stock higher.
If you are not comfortable with investing in individual stocks, you could consider trading indices. An index is created by many companies which are weighted according to different criteria. For example, an index can be based on the industry the company is on or because of their geographies. A good example of indices are Dow Jones, S&P and Nasdaq. The Dow is made of 30 companies that are a close representation of the US economy. The Nasdaq, on the other hand, is composed of the largest technology companies. History tells us that while indices fall in the short term, they tend to perform well in the long term. For example, in 1984, the S&P was trading at $230. In 2018, it reached an all-time high of $2940. Similarly, the Nasdaq was trading at $122 in 1985 and in 2018, it reached an all-time high of $7670. When you add the dividends, the returns are way higher much better.
To buy stocks and indices, you can buy them at your local stocks exchange. However, if you want to invest in global indices and stocks in one place, a good way to do it is to use contracts for differences offered by regulated brokers. This helps you to use leverage, which helps you make bigger investments. It also helps you to exit your trades at a click of a button. In addition, using tools like CopyTrading, you can automate your investments by automatically copying trades from the best traders.
As with all things in life, the toughest part is getting started. This is also true when you are thinking about retirement investing. The only way to solve this problem is to change thoughts into action and get started. Therefore, avoid this problem and start planning for retirement today.