You’ve made a decision and are going to start saving some of your income. Perhaps you have picked a number already—twenty percent of your funds will be invested. You are determined to honor this personal commitment all the way to your retirement.
In past generations, people would simply put their savings in a bank account, earn five percent interest, and forget about it. Every 14.4 years an investment value will double at five percent interest rate. Within a working lifetime that means you could expect doubling to occur almost three times.
Today, a savings account pays close to zero interest and is not a good choice except perhaps to safely park money for a rainy day or a future emergency. Investing has become more complicated. We will look at the most common and obvious choices for you to choose for your personal investments.
When you purchase a stock, you become a part owner of a public company. As an owner you are entitled to your share of the returns the company will generate.
Over a long period of time stocks can return investors generous gains, though the road is a bumpy one. Stocks go up for a while, and likewise they go down for periods of time. That is why it is important to stay the course, invest in stocks, and keep adding to your stock portfolio.
After decades in this plan your returns are likely to be an annual 5 to 10 percent of the amount of stock you purchased.
Open a free stock trading account from the almost too many to list. A new exchange called Robinhood won’t charge you commissions when you buy stock.
If you work for a company that offers a 401(k) retirement savings option, a payroll deduction that is high enough to take advantage of the company match amount is your best choice. The investment firm your company has chosen will offer you several investment options, ranging in risk and possible returns.
Depending on your risk comfort zone, you may opt for a choice that is unlikely to experience a lot of volatility (ups and downs), and in that way you will sleep well at night. That might be a fund that consists of money market, commercial paper, and other investments whose principal amounts remain intact although the interest returned may be minimal, perhaps only a few percent.
The riskiest choices may provide the greatest rewards over a long period of time, however. Growth funds, sometimes called “aggressive,” are usually offered alongside the safer investment selections.
In a deferred income or retirement account, you will not pay taxes until you begin withdrawals from your nest egg. By then, if you take out only what you need to live on, you will be in a lower tax bracket, but don’t plan on withdrawals before you turn 59 ½ years of age or you will be assessed early withdrawal penalties.
Finally, you can buy individual public company stocks or aggregate stocks in what are called exchange traded funds, or ETFs.
Low-fee ETF’s, such as Vanguard, spread the risk across a common denominator such as technology or even geography (United States companies, or Emerging Market companies for example). ETFs are also referred to as “passive” investments since you can just forget about watching the day-to-day changes in the individual companies and their prospects.
Bonds are the debt of our government or a business, a promise to repay the holder of the bond the face value of the bond. Treasury bonds issued by the U.S. government are safe, but also pay a low interest rate, as low as two to three percent. Public company bonds pay more interest but also have some risk if the company finds itself in financial trouble and has difficulty paying back the bond amounts or even the interest that accrues during the life of the bond.
Overall, however, bonds are considered somewhat safer than stocks, and many financial planners will suggest a portfolio mixed with stocks and bonds.
Early in your working life a heavy weighting of stocks is preferable because you have more time for the volatility to smooth out. Later in life the increased reliance on bonds is the safer route. When you retire, your weekly pay check is replaced by the interest payments on the bonds in your investment portfolio.
For many Americans the largest investment they will make is buying home. Most homes are purchased with a down payment and the assumption of debt, called a mortgage. Since there is a limit to how much land is available, the value of real estate over time generally increases. That means the increase in the value of your home will help fund your retirement because you can borrow against this increased value if necessary.
Beyond your primary residence, you can purchase a second home or a rental property, and enjoy the same appreciation in value. The transaction costs, however, can be high. The costs start with the purchase price, but can add up quickly with maintenance and renovations, property taxes, and expensive replacements such as a roof.
Problems can occur with tenants who are unable to pay their rent, or extended periods of time when seeking a new tenant. For most people this additional attention and expense might be seen as a headache.
The value of gold, like stocks, can be volatile; but over time, gold maintains its value. Gold can be a small part of your portfolio, perhaps 5 percent, because it can retain its value even if our currency loses purchasing power.
Gold investing can range from gold exchange-traded funds (ETF) to the purchase of physical gold, such as ingots or bars. But physical gold must be safeguarded in a vault or a safety deposit box. Gold ownership is attractive because you can pass it on to future generations, knowing it will always retain a high enough value to be considered precious and worth holding onto.
Since gold, unlike stocks, does not generate earnings or cash flow, it should be a relatively small part of your entire investment strategy.
Cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. It offers the possibility of eventually replacing paper and coins as legal tender, and even eliminating banks and their fees as the middleman.
The nature of this relatively new technology is still evolving however, and as such, it is not recommended as an investment that you can look to for your future retirement and be assured that it will increase in value.
The entire cryptocurrency eco-system remains mostly unregulated, and the value of Bitcoin or other digital currency can be far more volatile than stocks. In one sense it is a speculation, like gold, that does not generate earnings or cash flow but may go up in value. But the high level of uncertainty makes this investment choice one that should be avoided, at least for the time being, as we await regulation and maturity.
A portfolio of stocks and bonds, along with a primary residence, and perhaps a small investment in gold might just be the best and optimal strategy for your efforts to save for the future and your retirement.
Finding an investment advisor, a Certified Financial Planner, can help you in navigating these sometimes-perplexing choices; but once you have made the decision to create your portfolio and save a certain amount of your earnings, you have already done the most difficult part of the entire process.
No one who saves until “it hurts” has ever had regrets or been sorry that they saved too much money. Get started today.
The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.