Securing Your Future: A Guide To Safe Retirement Investing

Investing for retirement is a long-term strategy that requires careful planning and a good understanding of your options. The earlier you start, the more time your money has to grow, and the more experience you gain in investing. It's important to know the different types of retirement accounts and investments available to you, such as tax-advantaged accounts like 401(k)s and IRAs, which can provide significant tax benefits. You should also be aware of the fees associated with different investment options, as these can eat into your returns over time.

A balanced portfolio of stocks, bonds, and cash investments is generally recommended, with the specific allocation depending on your age, risk tolerance, and financial goals. It's crucial to monitor and rebalance your portfolio periodically to ensure it aligns with your risk tolerance and goals. Seeking advice from a qualified financial professional can be beneficial if you need guidance.

Additionally, it's essential to calculate your retirement expenses and income to ensure your savings can sustain your spending. Health care costs, life expectancy, and inflation should also be considered when planning for retirement. By starting early, educating yourself, and seeking professional advice when needed, you can invest safely and confidently for your retirement.

Understand tax-advantaged accounts

Tax-advantaged accounts are a great way to save for retirement, as they are designed to give you extra tax benefits when saving money. They can be tax-exempt, tax-deferred, or offer other types of tax benefits. Here's what you need to know about tax-advantaged accounts and how they can help you save for retirement:

Types of Tax-Advantaged Accounts

The most well-known tax-advantaged account is the 401(k), which was created by Congress in 1978. This is an employer-sponsored retirement plan that allows employees to contribute a portion of their salary before taxes. Some employers may also offer matching funds, further boosting your retirement savings. The 401(k) can be either a tax-deferred traditional plan or a tax-exempt Roth 401(k). With the traditional plan, your contributions are made with pre-tax dollars, lowering your taxable income. In contrast, the Roth 401(k) is funded with after-tax dollars, and you won't have to pay taxes on withdrawals in retirement.

Another option is the Individual Retirement Account (IRA), which is an independent retirement plan that you can open with a financial institution. Like the 401(k), the IRA also offers the choice between a tax-deferred traditional IRA and a tax-exempt Roth IRA. The traditional IRA allows you to make tax-deductible contributions, reducing your taxable income. On the other hand, the Roth IRA is funded with after-tax dollars, but the funds grow tax-free, and withdrawals in retirement are also tax-free.

Benefits of Tax-Advantaged Accounts

Tax-advantaged accounts provide a great way to lower your tax burden while increasing your long-term savings. They give you more choice and predictability in managing your taxes and provide meaningful incentives to save for retirement. Additionally, they can help relieve pressure on your budget by lowering your taxable income. By taking advantage of these accounts, you can boost your savings and give yourself more control over your finances.

Considerations and Limitations

It's important to note that there are specific tax rules, contribution limits, and withdrawal requirements for each type of tax-advantaged account. For example, early withdrawals from a 401(k) or traditional IRA before the age of 59½ may result in an early withdrawal penalty. Additionally, there may be income limits or phase-out ranges that affect your eligibility and contribution deductibility. Be sure to carefully review the rules and regulations for each type of account before making any decisions.

Plan for healthcare costs

Healthcare costs can be one of the biggest expenses a person faces in retirement. A retired couple aged 65 in 2023 could face long-term medical expenses of approximately $315,000, according to the annual Fidelity Retiree Healthcare Cost Estimate. This sum doesn't include long-term care, over-the-counter medications, or dental services.

Even with Medicare, medical costs could put you at risk of outliving your savings. Medicare only covers about two-thirds of your costs, and premiums, out-of-pocket expenses, and critical services not covered by Medicare can deplete your retirement savings.

• Health Savings Account (HSA): If you're not yet enrolled in Medicare, you can save money for healthcare costs with an HSA. HSA funds can be used to pay for certain medical premiums, including Medicare premiums and long-term care insurance premiums. These are available with high-deductible health plans (HDHPs) and offer triple tax advantages: deductible contributions and tax-free withdrawals for qualified medical expenses.
• Long-Term Care Insurance: Purchasing long-term care insurance is another way to fill the gap left by Medicare. This type of policy can pay a monthly benefit towards long-term care for a specified amount of time or for the remainder of your lifetime. An alternative is buying a life insurance policy that has the option of adding a long-term care insurance rider.
• Dental Insurance: If you do not have coverage for dental expenses via Medicare Advantage, you may also consider a standalone dental insurance plan. Many plans focus on the types of coverage that retirees need, including crowns, root canals, dentures, and tooth replacements.
• Retirement Accounts: You can also use savings accounts, such as Roth or traditional IRAs, to pay for medical expenses in retirement.
• Government Programs: Government programs such as Medicare can help cover healthcare costs in retirement.
• Disability Insurance: Disability insurance can also help cover medical expenses in retirement.

It's important to understand and plan for growing medical costs, whether you're early in your career, close to retirement, or already transitioning out of the workforce.

Calculate net worth

To invest safely for retirement, it's important to understand your net worth, which is the value of your assets minus your liabilities. This calculation can give you an idea of how much money you have and where it goes, helping you to make informed decisions about your retirement investments. Here are some steps to calculate your net worth:

Identify Your Assets

Your assets are the things you own that have monetary value. This includes cash and cash equivalents, such as savings accounts, Treasury bills, and certificates of deposit (CDs). It also includes securities like stocks, mutual funds, and exchange-traded funds (ETFs). Additionally, real property, such as your home, rental properties, or a second home, and personal property, such as vehicles, boats, collectibles, and jewellery, are considered assets.

Determine Your Liabilities

Liabilities are the debts you owe. This includes credit card balances, loans (such as student loans, car loans, or mortgages), and any other financial obligations, such as bills and taxes.

Calculate Your Net Worth

To calculate your net worth, subtract the total value of your liabilities from the total value of your assets. This number represents your current financial position and can help you track your progress towards your retirement goals. It's a good idea to calculate your net worth regularly, such as once a year, to ensure you are on the right track.

Improve Your Net Worth

To improve your net worth, you can focus on two main strategies: reducing your liabilities while maintaining or increasing your assets, or increasing your assets while keeping your liabilities constant or reducing them. This can be achieved through various means, such as creating a budget, using debt reduction strategies, or increasing your income.

Safe Retirement Investments

Once you understand your net worth, you can explore safe investment options for retirement. Some low-risk income sources include tax-advantaged retirement accounts like 401(k)s and individual retirement accounts (IRAs), dividend-paying stocks, income-producing properties, savings accounts, and part-time employment. Remember to consider your risk tolerance and financial goals when making investment decisions.

Diversify investments

Diversifying your portfolio is the first and best protection of your nest egg. The more diverse a portfolio, the safer it is. If one type of investment tanks, a diverse portfolio will protect you from financial ruin.

A common diversification strategy is to divide your portfolio between stocks and bonds. Stocks can offer big payoffs but are high risk, while bonds offer little to no risk but pay out less than stocks. One rule of thumb is to keep your bond percentage close to your age, adjusting as life goes on. So if you're 30, about 30% of your portfolio should be in bonds. By the time you retire, 60% to 70% of your portfolio should be in bonds.

However, don't stop with just stocks and bonds when diversifying your portfolio. Look for other ways to spread the risk among your investments. Investing in largely unrelated sectors, like pharmaceuticals and telecommunications, is a good idea. You should also consider investing in economies throughout the world, rather than companies in just a handful of countries or a single region.

Correlation is an important concept to understand when it comes to diversification. Correlation is the extent to which two things move in the same direction and by similar amounts at the same time. You want to own a collection of investments that will not move in tandem. This will give you the opportunity to sell and reallocate to a temporarily out-of-favour asset class.

For example, there is a very low correlation between long-dated US Treasury bonds and the S&P 500. That's why bonds make an effective diversification partner for your stock portfolio.

You can also diversify by investing in a health savings account (HSA). HSAs are tax-advantaged medical savings accounts available to employees enrolled in a high-deductible medical plan. These accounts offer "a triple-tax-advantaged account, meaning funds are contributed tax-free, grow tax-deferred and can be withdrawn tax-free to pay for IRS-qualified medical expenses."

Withdrawals strategy

There are several withdrawal strategies that can be used to stretch money further for a long retirement. These can be combined and changed over time.

Withdraw a fixed percentage

The 4% rule is a longstanding retirement withdrawal strategy. It involves withdrawing 4% of your retirement savings in the first year of retirement and then withdrawing the same amount, adjusted for inflation, in subsequent years. This approach is simple to follow and provides a predictable amount of income each year. However, it has been criticised for not considering rising interest rates and market volatility.

Take fixed-dollar withdrawals

Some retirees take out a fixed dollar amount annually and reassess at the end of a fixed period. While this provides predictable income, it doesn't protect against inflation.

Consider a total return approach

This strategy involves withdrawing a set percentage of your portfolio annually, with the dollar amount varying based on the underlying value of your portfolio. While this creates uncertainty, choosing a percentage below the anticipated rate of return could increase your income and account value.

Use account sequencing

When making withdrawals, be strategic about where you pull your money from. The optimal order is one that minimises taxes and allows money in long-term buckets to continue to grow.

Limit withdrawals to income

This approach involves only withdrawing the income generated by investments, such as dividends or interest, and leaving the principal intact. This ensures your account doesn't run dry but can result in unpredictable annual income.

Minimise mandatory distributions

Traditional 401(k) accounts and IRAs have required minimum distributions, known as RMDs, which can increase taxable income. One way to reduce or eliminate RMDs is to convert money from traditional retirement funds to Roth accounts.

Other Considerations

When choosing a withdrawal strategy, it's important to consider taxes, life expectancy, and additional income sources. Consulting a financial professional can help you navigate the tax implications of your withdrawals and ensure you're making the most of your retirement assets.

Frequently asked questions