Today, only a few people think of their future and start to invest for their retirement, and yet, only one out of three 65-year-olds will live past their 90, and one out of seven will live past the age of 95. What does this tell you? You need to open your eyes and start investing for your retirement.
If you want to retire at the age of 60, you have to ensure that your retirement savings will last you for up to 30 years. Now this is where the question arises but what is the best way to invest for retirement? This blog post will focus on the best ways to invest in retirement.
1. Investing in Mortgages
Investing in real estate is not only limited to buying a property. There are several ways, and the most popular is investing in mortgages. There are three different ways you can invest in this way, private mortgage, public mortgage and mortgage syndication. A public mortgage is where you publicly trade funds and can buy or sell whenever possible.
A private mortgage does not publicly trade; once you invest your money, it will be hard to get it back immediately. Mortgage syndication is where you pick a person or more to buy a mortgage directly, but this only works with those with experience in mortgage investing. But if you have decided to invest in mortgages, you will have to look for someone more knowledgeable to help you make the right decision.
2. REITs
Most retiree thinks of investing in real estate. Looking at its good side, real estate will bring money regardless of how the competition is in the market. But you will need enough to cover damages, mortgages and repairs.
To worry about the above things, you must consider buying a share of Real Estate Investment Funds (REITs). This company does not focus on all types of properties; they do office properties, residential real estate, etc. There might be some capital appreciation if properties are sold, but the main focus is generating a steady income from rental properties.
REITs can provide the following if you invest in them:
- A liquid asset that is easy to buy or sell.
- A regular cash flow generates a long-term retirement benefit.
- You can choose from many REITs focusing on a specific investment.
Challenges of REITs
- 90% of income is paid to investors. Therefore, REITs remain with only a small amount to reinvest.
- The management fee of REITs is very high compared to other managed investments.
- The income that investors earn is usually taxed very high.
3. Income Annuities
This is a contract between you and the insurance company where you pay a certain amount of money, and the income the insurance company gives you is guaranteed no matter how the markets are. This retirement investing method is greatly advertised and is believed to be the safest way to invest your money.
Before you start to think of investing in annuities, you must have a great understanding of it. Some insurance companies have complicated phrasing that is difficult to understand or even hidden fees you must pay.
There are three main annuity contracts, namely:
Variable annuity
The language in this type of annuity is unclear, leading you to lose a lot of money if the procedures perform poorly. On top of that, you are not guaranteed to be getting any amount of money.
Index annuities
Also called fixed index annuities, they come with protection if the markets end up being low, and also, you are made clear on what you will gain or lose in that particular year.
Fixed annuities
Unlike the above two, its price is slightly lower. The language is very clear for you to understand so that you do not lose any money and are offered to repay your purchase price with a modest return.
Defects of Annuities
- You could pay more taxes. For example, if you are 59 and a half, you might be subjected to 10% interest during your withdrawals.
- If you are not careful, you might lose control of your investments, especially if a highly-rated insurance company does not underwrite your annuity.
- Expenses may add up at any time.
4. Asset Allocation
This is simply a strategy to help you balance the reward and risk by adjusting the asset you invested with your goals. It simply balances your cash flow, bonds and stocks. Asset classes fall into three broad categories: Fixed-income, equities, and cash and equivalents.
Let us look at an example below to better understand asset allocation.
Let us say you want to invest $10,000 for five years. Your financial advisor may advise you to distribute your portfolio across three major categories: stocks, cash and bond, and this is how your portfolio will look.
Bonds
High yield bond – 25%
Government bond – 15%
Stocks
Large-cap value stock – 15%
Small-cap value stock – 25%
International stocks – 10%
Cash
Money market – 10%
That is how your distribution across these three portfolios would look if you invested that money. But as you age, you must check your asset allocation portfolio to ensure the market hasn’t shifted your percentage allocation away from your goals.
