There are five types of investments you can make to create a retirement investment strategy. Money invested for retirement should be thought of as long-term investments.
There are a lot of options in the stock market. You can buy individual stocks, mutual funds, index funds, dividend-producing funds, blue-chip stocks, and more. Which ones will be best will depend on how far you are from retirement, the fees, and where you do your investing.
Before you buy any stocks, read our investing in stocks guide. Make sure you understand what you’re buying and how it plays into your long-term plan.
Bonds are a way of loaning money to a separate entity. Municipal bonds, for example, are loans you give to a city or township. Bonds tend to be less volatile than stocks and can have much lower rates of return. However, the rate of return is steady, since bonds come with a set interest rate you’re paid throughout the term of the bond. When it comes to retirement planning, bonds are a more reliable income.
Bond interest rates fluctuate when the Federal Reserve changes interest rates, so keep an eye on that.
Another option that comes in many forms is annuities. Annuities are often lumped into investments but are actually a form of insurance. With immediate annuities, for example, you pay the insurance provider a lump sum of cash and receive regular monthly payments in retirement.
With a variable annuity, your money is invested in a portfolio of your design. To get the same guaranteed return, you can add in what is called a “rider“, or a guarantee of payment. Riders come with additional fees and each has its own formula for how your payments are calculated. Annuities are often an expensive option for your retirement portfolio, and as such many people disregard them. However, many other people like them for securing monthly payouts in retirement.
4. Real Estate
We all need somewhere to live and real estate investors bank on that fact to earn them money. Collecting a rental check-in retirement is appealing to many people. Real estate investing can be very lucrative, but it also comes with generally higher upfront costs and the ongoing maintenance costs of home improvement, property taxes, and a mortgage. Rental real estate is best for people who have some handyman skills themselves or have the money to hire people to fix or manage the property.
If you want to invest in real estate without buying and managing a property yourself, you can use a crowdfunding service like CrowdStreet or invest in Real Estate Investment Trusts (REITs).
Keeping some money in cash, especially as you near retirement, is advised by almost every single financial advisor out there (Find the good ones with Paladin Registry ). Cash is king, and when it comes to an emergency, it can’t be beaten. How much cash you want to keep will depend mostly on your risk tolerance. Those who value more stability may want to keep up to a year’s worth of living expenses in cash. Those who are more risk-tolerant will do fine with four months of living expenses in cash.
These are just some retirement investment options, but they represent the major ways of constructing a diversified investment portfolio.