How to Invest for Retirement Wisely

Today, the average American has only 78% of the income needed to cover expenses during retirement—down from 83% in 2020. It’s critical to save early and invest strategically to take control of your retirement outlook. Creating retirement goals, building a...

Today, the average American has only 78% of the income needed to cover expenses during retirement—down from 83% in 2020.

It’s critical to save early and invest strategically to take control of your retirement outlook. Creating retirement goals, building a plan to execute, and educating yourself about the market will empower you to invest for retirement intentionally. Let’s dive in.

Setting Retirement Goals

Before you can begin investing in your retirement, you have to know what your short- and long-term goals are. As a jumping-off point, focus on the who, what, when, where, and why of retirement:

  • Who do you want to spend retirement with? You may want to be closer to family or friends in a retirement community.
  • What will you do in retirement? Do you want to work part-time, volunteer, or try out some new hobbies?
  • When can you retire? Depending on your savings strategy, when you want to retire and when you can afford to retire may be different statements.
  • Where do you want to live? Are you interested in moving closer to your family? Or would you instead focus on traveling around the world?
  • Why do you want to retire? It may seem like a silly question. Why wouldn’t you want to retire? But people retire for many different reasons, whether it be career burnout, more time to explore their passions, or taking steps to improve their health.

Most importantly, remember that retirement planning is a detailed process that evolves as you grow and change. Your goals will likely be different at 25 years old than they are at 45 years old.

Considering Retirement Costs

How much money do you need to retire? The age-old question strikes again. Your retirement costs depend on your income, lifestyle, and healthcare needs. Still, you can expect to spend 55%-80% of your current annual income annually throughout retirement.

To better understand your retirement costs, break them down into essential and leisure expenses. Necessary expenses include rent or mortgage, food, utilities, maintenance, long-term care, and healthcare, often the most prominent expense retirees will incur. According to a 2023 Fidelity study, the average retired couple at age 65 can expect to spend nearly $315,000 on just healthcare expenses in retirement. 

Leisure expenses in retirement are non-critical items such as a vacation home, hobbies, entertainment, or traveling. Even though these expenses are not critical for survival, they are essential to your mental well-being in retirement. 

As you prepare for the potential costs of retirement and create savings goals, consider what’s most important to you and what will help you live the most fulfilled life.

Understanding Risk

How much risk are you willing to take to reach your goals? Are you comfortable with the volatility of the market? Does the thrill of a winning investment light your fire? Your risk tolerance will be critical in determining your retirement investing strategy.

Risk tolerance is your ability and willingness to endure the market’s volatility, impacting how you plan your portfolio and what investments will work best for you. For example, suppose you’re near retirement and have a low-risk tolerance. In that case, you will likely have a conservative investment strategy with predominantly lower-risk investments.

The main determinants influencing your risk tolerance and how you should invest for retirement are timeline, age, goals, and portfolio size. Typically, younger individuals take on more risk. Still, if your portfolio size is small, taking on higher-risk investments may not be wise.

At the end of the day, how you invest for retirement will depend solely on your comfort level. Everyone handles risk differently; some people are naturally more comfortable taking risks than others. Refrain from basing your investment strategy on what young, savvy investors with deep pockets are doing; focus on your financial and retirement goals.

Making Investment Choices

An intelligent portfolio is diversified and has a mix of stocks, bonds, and alternative investments. Have you ever heard the saying, “Don’t put all your eggs in one basket”? That’s the mindset you should have when allocating your assets.

A diversified investment portfolio helps manage risk and can minimize the impact of market downturns. Alongside risk management, portfolio diversification has several benefits, including:

  • Enhanced potential returns
  • Long-term stability
  • Adaptability to changing markets
  • Protect against losses
  • Create better investment opportunities

Market Timing vs. Time in the Market

Raise your hand if you’ve ever heard one (or both) of these statements:

  1. You can time the market if you try hard enough
  2. The market will always fully recover after a crash

These are two of the most common market timing myths that continue to wreak havoc on investors today. Let’s quickly break down these myths:

  1. Market timing: Timing the market perfectly is impossible. Often, investors will wait for the perfect moment to invest, and the moment vanishes in the blink of an eye. Instead, the best strategy is to avoid trying to market time. Instead, investors must work with a trusted advisor, make an investment plan, and start immediately.
  2. Market recovery: The stock market has historically recovered after significant downturns, but there’s no guarantee that will always be the case. And even if it fully recovers, there’s no set timeline—it could take 30 years!

There’s no perfect time to invest, so it’s important to start investing now so you can reap the rewards years from now. Investing long-term allows you to take advantage of the benefits of compounding and better long-term returns.

Start Investing Today For a Brighter Retirement Outlook

Creating an investment strategy for retirement can be a lot to tackle on your own, so do it with a partner who understands your goals and has the expertise to bring those goals across the finish line. Get in touch with our team today.