As most people will tell you, it’s never too early to start thinking about retirement. Investing sooner means you’ll have more time to learn from your mistakes, and more importantly, more years to take advantage of the power of compound interest.
But with so many investment options available, it’s hard to tell which assets are most important or most valuable for retirement. In this guide, we’ll explore the best investment options as you approach retirement, and how to approach each asset type.
What Makes a “Good” Retirement Investment?
Let’s start by defining what makes an investment “good” for retirement. To effectively retire, you’ll need a reliable stream of revenue to pay for your expenses. That means your investments would ideally be:
- Income-producing. For the sake of convenience, your investments should produce income of their own. Rather than getting involved with buying and selling, or dealing with liquidity issues, you can simply collect a specific amount of money each month.
- Stable/consistent. Some investments are notoriously volatile or risky. It’s much better for retirees to have assets that are stable and consistent. Low-risk assets are preferable, and ones with predictable growth trajectories are even better.
- Capable of growth. Even though low-risk and income-producing qualities are higher priorities, it’s still important to choose assets capable of growth. This will help ensure you never outlive your nest egg.
One of the best options is investing in real estate. While there are many ways to get involved in real estate investing, like investing in commercial properties or speculating about neighborhood growth, the best approach for retirement is buying rental properties.
With a rental property, you’ll be able to collect rent from tenants every month, often in an amount that exceeds your ongoing expenses. Assuming you’re able to keep vacancy rates under control and maintain a number of different units, you can collect thousands of dollars per month from your rental strategy. On top of that, your property values should appreciate over time, giving you an avenue for growth.
The biggest problem is finding the “right” properties to invest in, since not all rental properties will be profitable or appealing to tenants. Getting your real estate license can help you gain access to more lucrative property deals, and help you better understand the local markets; it’s a lot of work, but it’s worth it if you want stable, long-term investments in your portfolio.
Stocks and ETFs
A slightly more accessible option is investing in stocks. Stocks represent shares of ownership in a publicly-traded corporation; prices fluctuate in response to economic trends and company news, but in a healthy economy, good companies tend to reliably increase in price over time.
The best benefit for retirees is that many stocks (particularly those from well-established companies) pay dividends—quarterly profit distributions that can provide you with 2 to 4 percent of your total investment in annual income. In other words, a dividend of 3 percent would provide you with $3,000 per year for every $100,000 you have invested. That’s on top of whatever price increases the stock provides you over time.
Of course, there’s no guarantee that stock prices will rise, and not all companies offer a sizable dividend. That’s where exchange traded funds (ETFs) come in; they allow you to invest in many different stocks at once, automatically diversifying your holdings. You can even choose an ETF specifically focused on dividend-paying stocks, so you can maximize your income.
Bonds are one of the safest investment options available, since they function kind of like loans; you’ll offer your money to a company or organization, and they’ll pay you back after a fixed term, with interest. Bonds tend to have lower growth rates than stocks or real estate, so they’re not an ideal retirement investment by themselves. However, they can be useful in grounding your strategy with a secure, practically guaranteed investment. There are also ETFs that combine many different bonds together, allowing you to diversify your bond investment strategy further.
The Importance of Diversification
Finally, it’s important to understand the value of diversification. As you’ve seen, each of the above asset types has distinct advantages and disadvantages, and each has its own set of risks. By diversifying your portfolio, or ensuring that you have a balanced investment in many different assets, you’ll dramatically lower your exposure to risk. For most people, the best move is to start young with a high-risk, high-reward portfolio, and gradually shift your assets to safer, less risky assets.
Retirement investing isn’t going to look the same for everyone. Individuals will have different goals, different preferences, and of course, different levels of access to capital. That said, these fundamental investment types can help almost anyone get closer to achieving their retirement goals.