One of the most common pieces of advice when saving for retirement is to start saving early to build a substantial corpus for retirement. Doing so not only helps you become financially secure and live comfortably in your post-retirement years but also offers you peace of mind. That said, you need to choose the right investments that will allow you to save a significant sum of money, while also adhering to the rules enforced by the Internal Revenue Service (IRS) with respect to income eligibility for retirement savings plans, tax implications, withdrawal restrictions, and more.
Additionally, retirement planning has undergone a significant change over the past couple of decades due to the increased life span of retirees in the United States. This has in turn increased the possible retirement span to 20 years (from the previous held 14 years). This means you would need to save a much higher sum for retirement compared to earlier generations. This change, coupled with rising inflation, could also further complicate your retirement plans. In June 2022, inflation rose to 9.1% in the country, a 40-year record high.
The effect of inflation can be offset by saving sufficient funds and choosing investments in retirement that will allow you to build a well-diversified investment portfolio. Invest in instruments that offer you the desired returns while keeping your tax bill low. Ensure that your investments match your risk tolerance, the standard of living, investment horizon, and desired earnings. Reach out to a professional financial advisor who can help you create a retirement investment strategy based on your risk appetite, and future financial goals and needs.
Below are some of the best investments for retirees to consider for a comfortable retirement:
1. Maximize your contributions to tax-advantaged retirement accounts
While investing for retirement, you need to understand the differences between different types of investment accounts. You may invest in different options through an online brokerage account, but it does not offer tax benefits. Instead, you could consider investing in tax-advantaged retirement savings accounts, such as a 401(k), IRA, Roth IRA, etc. Compared to a brokerage account, these accounts may lack flexibility when it comes to asset allocation. However, they make up for it due to their significant tax advantages.
You can earn tax-free growth over time by investing your pre-tax income in a traditional IRA and 401k. However, you will have to pay tax at the time of making a withdrawal in retirement when you may be in a lower tax bracket. You can also invest in the Roth versions of the IRA and 401k accounts and earn tax-free returns by investing your after-tax income. Additionally, you can make tax-free withdrawals during retirement subject to certain conditions. Investing in a Roth IRA or Roth 401k would be especially beneficial if you expect to be in a higher tax bracket in the future. You also have the option of converting your traditional retirement accounts into their Roth counterparts if you meet certain requirements set by the IRS.
Both 401ks and IRAs have annual contribution limits that are revised by the IRS from time to time. For 2022, you can make an annual contribution of $20,500 to your 401k (both traditional and Roth). If you are 50 and up, you can make an additional catch-up contribution of $6,500, bringing your total to $27,000. As for your traditional and Roth IRAs, you can contribute up to $6,000 each year along with an additional catch-up contribution of $1,000 if you are 50 years old or above. This brings your total contribution to $7,000 for the year. Further, you must adhere to the income eligibility limits at the time of contributing to a traditional or Roth IRA. You can check the said limits at the IRS website. Ensure that you max out your annual contributions for all tax-advantaged retirement accounts to earn tax-free growth and tax-free returns on your retirement savings.
2. Invest in target-date funds
Similar to mutual funds and exchange-traded funds (ETFs), target-date funds comprise stocks, bonds, and other investments with one key difference. You can invest your money in target-date funds for a fixed time frame after which your asset allocation is adjusted as per the fund investment strategy over a certain period of time. You would be able to make the most of these funds if you have a fair idea about when you will retire. For example, if you plan to retire in 2025, you can search for target-date funds in the market titled “Portfolio 2025”, “Retirement Fund 2025”, etc., which have been specially created for retirees who are planning to retire in or around 2025. Herein, the time period is critical as the composition of these funds would change automatically, switching to a more conservative asset allocation, as you near retirement. Moreover, 401ks offer the opportunity to invest in target-date funds. Before investing, do consider the fees and if the fund composition matches your long-term financial goals and needs.
3. Invest in dividend-paying stocks
Investing in companies that pay out regular dividends to their investors can help you secure a steady, fixed income for retirement. Dividend-paying stocks are ideal for providing income stability in retirement as they offer a steady retirement income coupled with capital appreciation due to the increase in stock value. If you have a low to moderate risk appetite, dividend-paying stocks can be a good investment for the future. Firms usually pay dividends in the form of shares, cash, or cash equivalent.
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4. Don’t miss out on investing in real estate
Generally, investors tend to invest in traditional assets such as stocks, bonds, mutual funds, etc., and overlook real estate investments. Real estate can be a considerably profitable investment because it provides income on a regular basis regardless of market performance. However, before investing in real estate, you should understand that you would need to put in substantial resources, effort, and time to make it a success. Real estate investments require exhaustive knowledge and substantial capital investment. In addition, you would need to monitor and manage your real estate holdings to ensure that they remain in good condition. If you invest in real estate, you can rent out the place to earn a fixed retirement income. However, don’t forget to account for the ensuing costs like mortgage, maintenance, repairs, and damages.
You can also invest in REITs (Real-estate investment trusts) if you do not want to incur the aforesaid costs but want to earn high returns. Considered to be a lower-risk investment option compared to rental real estate, you can invest in firms that either own or mortgage real estate - shopping malls, retail centers, warehouses, apartments, etc. REITs offer a regular income to investors. However, you would have to shell out a fee for the same in lieu of firms taking care of different aspects of owning real estate such as buying, renting, managing, collecting rent, etc. Both ETFs and mutual funds offer REITs as an investment option to their investors.
5. Consider investing in retirement annuities
A retirement annuity is an investment instrument that promises regular, long-term income payments for a retiree for their remaining life. It provides financial safety and security during retirement but can be considered illiquid to some extent due to having large up-front costs and early withdrawal penalties. There are different kinds of annuities that you can buy such as:
- Immediate annuities: Under immediate annuities, you pay a lump sum to the insurance company. The firm, in turn, pays you a fixed sum of money every month, quarter, six months, or year. Immediate annuities offer regular income during retirement with returns being comparatively higher than cash deposits.
- Variable annuities: If you opt for a variable annuity, you receive a lifetime income rider that adds stability to your retirement portfolio. These annuities generate high returns similar to equity investments. However, with the increased returns, you also open yourself to a much higher threshold of market risk as well.
- Deferred annuities: If you have invested in deferred annuities, you will be eligible to receive income during your retirement years. Though to receive said income, you will have to pay the insurance company in the present.
Based on your retirement income needs, you can choose an annuity that best works for you. That said, you should not invest too heavily in annuities. Apart from variable annuities, they tend to offer average returns. Further, there are index annuities available as well that you can use to offset the effect of inflation. These annuities offer a minimum guaranteed payment and pay an interest rate based on the market performance of an index such as the S&P 500.
6. Put your money in Qualified Longevity Annuity Contracts (QLACs)
A kind of deferred annuity, QLACs allow you to receive regular income payments during the latter years of your life. If you have invested in a traditional 401k or IRA, you have to begin taking RMDs (Required Minimum Distributions) from your accounts when you reach 72 years of age. If you fail to do so, you would have to pay a penalty on the same. With QLAC, you can defer taking out your RMDs till you turn 85 which will allow you to keep your money safe for a longer period of time. In addition, you would be deferring your tax liabilities as well as keeping your tax bill low till the time you begin withdrawing your RMDs. For 2022, you can buy a QLAC for $145,000 that pays out indefinitely. Though QLACs offer you an assured income in retirement, they can be a risky investment if you pass away without using your retirement money. Buying a QLAC locks a certain portion of your retirement funds that you would not be able to use until the expiry of the deferment period which might be much longer than you anticipate living.
To conclude
Investing for your retirement needs require knowledge, time, effort, and financial acumen. Finding the best investments for retirees is not always easy. You have to ensure that the investments align with your risk appetite, life stage, and financial preferences at all times. In addition, you may need hands-on expertise and experience to manage your investments. You cannot eliminate risk entirely but can take certain steps to minimize it.
You can consult with a professional financial advisor who can find the right investments for retirement and secure your retirement. These professionals have years of experience and expertise that can help you build a foolproof investment portfolio tailored to your specific financial needs. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.