December 3, 2022

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3 Best Ways to Invest for Retirement

It’s very likely that your retirement will be the largest single financial commitment you’ll ever have. Once you’re done working, you’ll be relying on Social Security, any pension you might have earned, and your investments to cover your costs for the rest of your life.

In a retirement that could very well last for decades, you’ll want a nest egg powerful enough to get you through it comfortably. That requires some serious advanced planning and dedication. Fortunately, it’s very possible to get there if you follow all three of these best ways to invest for retirement.

Image source: Getty Images.

No. 1: Start early

The younger you are when you start investing, the easier it is to successfully reach a comfortable nest egg by the time you retire. This is because your money has that much longer to compound on your behalf, letting the potential growth and reinvested dividends over time do most of the hard work of building your wealth.

The table below shows how much you’ll have to sock away as a one-time investment to reach $1 million by age 65, depending on the rate of return you earn and the age you are when you save up the cash.

Age

10% Annual Returns

8% Annual Returns

6% Annual Returns

4% Annual Returns

25

$22,095

$46,031

$97,222

$208,289

30

$35,584

$67,635

$130,105

$253,415

35

$57,309

$99,377

$174,110

$308,319

40

$92,296

$146,018

$232,999

$375,117

45

$148,644

$214,548

$311,805

$456,387

50

$239,392

$315,242

$417,265

$555,265

Table by Author.

As long as you earn any sort of positive return over time, the younger you are when you start investing, the less you have to put away to get to your financial goal. That’s why starting early tops this list of best ways to save for retirement.

No. 2: Invest often

Most people don’t have the ability to come up with a one-time five- or six-figure investment to sock away for retirement. Instead, most ordinary people work for a living and might be able to come up with a little bit each paycheck to invest for those longer-term priorities.

Fortunately, that enables a great strategy — known as dollar-cost averaging — which helps you smooth out your returns over time. If the market goes up, your already-existing nest egg will grow, but your new purchases will buy fewer shares. If the market goes down, your already-existing nest egg will shrink, but your new purchases will buy more shares.

Over long periods of time, if you use that strategy by putting funds into a broad index investment, you’ll likely earn returns in line with the average returns of the index in which you invest. That makes it a great way to invest for the long haul and not worry too much about the risk of putting all your money into the market just before a crash.

In addition, particularly when combined with starting early, investing often can bring the amount of money you’ll need to come up with down to a more manageable level. The table below shows how much you’ll have to come up with each month to retire at age 65 with $1 million, depending on the rate of return you’ll earn along the way and the age you are when you get started.

Age

10% Annual Returns

8% Annual Returns

6% Annual Returns

4% Annual Returns

25

$158

$286

$502

$846

30

$263

$436

$702

$1,094

35

$442

$671

$996

$1,441

40

$754

$1,051

$1,443

$1,945

45

$1,317

$1,698

$2,164

$2,726

50

$2,413

$2,890

$3,439

$4,064

Table by Author.

All of a sudden, the numbers become achievable for those who begin investing early enough in their careers. Even for those starting mid-career, that millionaire status might be in reach if they have decent incomes and find themselves with extra cash flow as their debts get paid off.

No. 3: Make it automatic

If you’ve got a 401(k) or other similar employer-sponsored retirement plan available to you, signing up to participate in it could also provide an incredible boost to your nest egg. There are multiple reasons for this.

First, once you sign up and pick your investments, the money for your contributions is taken directly out of your paycheck and automatically put to work on your behalf. That can help remove the temptation to spend the money (since you never really see it), and help keep you actively contributing.

Next, many employers offer matches, where your boss will kick in a bit based on a combination of your salary and the amount you’re saving for yourself. Anything you get from a match boosts the amount of money working on your behalf, and it’s the key reason why investing to max out your 401(k) match is generally the first investment you should make.

As if that weren’t enough, investing in your 401(k) offers tax advantages. In a traditional 401(k), you get an immediate tax deduction based on your contribution. In a Roth 401(k), you can potentially take your money out completely tax free in retirement. In either-style 401(k), your money will compound tax-deferred while in the plan, helping your nest egg grow faster.

Get started now

These three tools can each play an important role in growing your retirement-account balance. Put them all together, and they create a powerful combination that can accelerate your ability to build a nest egg for your golden years.

The sooner you put your plan into action, the better your money can work on your behalf to get you closer to where you want to be. So get started now, and see how far starting early, investing often, and making it automatic can take you on your quest for a financially comfortable retirement.


https://www.fool.com/investing/2022/01/06/3-best-ways-to-invest-for-retirement/