Are you lying awake at night, wondering if your retirement money is properly invested? If so, it’s probably not much comfort to know that millions of other Americans are tossing and turning with the same worries.
Although retirement investing may seem complicated, it doesn’t have to be. As with just about anything in life, a little education can go a long way toward success.
Here are some ways to wring the most out of your retirement investing.
1. Get your full employer 401(k) match
Find out if your employer matches your 401(k) contributions. If so, ask about the maximum match the employer will make.
For example, if your employer matches contributions dollar for dollar up to 6% of your $4,000 monthly salary, you’ll get $240 free in your account for the first $240 you save — every month.
If you don’t take advantage of the employer match, you’re throwing away free money.
2. Bone up on investing
People trying to get the right retirement investment mix typically focus on three vehicles:
- Stocks: Stocks are basically ownership in a company. They offer the most potential for reward, but they also present the greatest risk.
- Bonds: While stocks are an “ownership” investment, bonds are “loanership.” You’re lending money to a company (corporate bonds), local government (municipal bonds) or Uncle Sam (Treasury bonds). Generally, bonds pay the holder (you) a fixed rate of interest, are due on a certain date and are backed by the company or government agency that issues them. That’s why they’re considered safer and more stable than stocks, albeit with a lower expected return.
- Cash: These types of funds don’t earn much, but they are less risky than stocks or bonds.
3. Decide how much to put in each investment type
Here’s a simple rule of thumb often cited by Money Talks News founder Stacy Johnson: Subtract your age from 100. Use the figure you get as the maximum percentage of your savings you should have in stocks.
So, say you’re 20 years old. You could have up to 80% of your savings in stocks. But if you’re 60, keep it to 40%, because stocks are riskier and you’re close to retirement.
Once you’ve figured out how much to invest in stocks, divide the remaining part of your savings into other types of investments. For example, you could divide the money equally between an intermediate bond fund and a cash equivalent fund.
These percentages aren’t set in stone — they’re just a guide. Increase or decrease them to suit your needs and risk tolerance.
4. Keep expenses down
Investment fees can dig deep into your profits. Focus on keeping expenses super low.
Consider this example from “Of All the Fees You Pay, This Is the Worst”:
Say you have a 401(k) plan with a current balance of $25,000. Over the next 35 years, you earn an average return of 7% on that balance. Even if you don’t contribute another penny to your account during those 35 years, here’s how much money you’d have if your account fees were 0.5%, compared with fees of 1.5%:
|Beginning balance||Annual return||Fees||Balance in 35 years|
So, the higher fee would cost you an additional $64,000 over 35 years.
5. Use dollar-cost averaging
No one expects amateurs to know when to buy and sell stocks. After all, most of the pros can’t even get that right.
Fortunately, there’s no need to worry about timing the stock market if you use a simple system called dollar-cost averaging. That entails making your investments in fixed amounts and at fixed intervals — for example, $100 every month.
This method gives you insurance against market dips because you’re buying more shares when they’re cheap and fewer shares when they’re expensive.
6. Choose index funds
There are two main types of mutual funds. How these funds are run affects their fees:
- Actively managed mutual funds, or active funds, are run by financial professionals who decide which stocks or bonds to buy and sell within the fund. They aim to outperform stock market indices — and charge higher fees for their effort.
- Passively managed mutual funds, or index funds, simply aim to mirror a stock market index such as the S&P 500. Fees are therefore minimal.
Past surveys have found that the average expense ratio of active funds is much higher than the expense ratio of index funds.
7. Consider target-date funds
This popular type of mutual fund is appealing because it takes a lot of the work out of investing. You just choose the date when you want to retire — 2030, for example. The fund is designed to do the rest, rebalancing your asset allocation over time based on your retirement date, or “target date.”
To learn more about the pros — and cons — of this type of investment, check out “5 Questions to Ask When Picking a Target-Date Fund.”