It is very important to save up for retirement to make sure that you are able to live a good life after retiring. There is a large amount of information available online that claims to help you save for your retirement. A lot of it is good information but there is also a lot of scams out there. In between the good information and the scams you will find a lot of well meaning but bad advice.
In this article we are going to look at some do and don’t when it comes to saving up for your retirement. I am assuming that you already are taking advantage of the tax benefits of putting the maximum allowed amount into your 401K every year.
I am not going to talk about private pension insurance. I might cover that in a later article but the topic is to broad to cover in this article.
Understanding your needs
Long term investments
You retirement is hopefully a long time from now. You should start saving for your retirement in your 20s or the early 30s at the latest. The money you save is going to be invested for 30 years of more provided you retire at 65. This puts you in a unique position to make a high return on the stock market. The stock market can be a medium risk investment if you invest short term. This is not the case when you invest over 30 years. There is virtually no risk at all with such a long time span provided you invest in large established companies (blue chip stock). You are likely to suffer through several crashes during that period and still make a very high average yearly return.
Yearly returns
Once you retire you are going to need a certain amount to live on each year. You need to have saved up enough money that the money last you your life out. If we assume that you need 60 000 a year and that you will live until 85 then you are going to need to have at-least 1 200 000. This is a minimum. It does not provide you with money for extra purchases nor does it provide you with enough money if you live longer then expected.
I discourage you from ever using this method to calculate how much money you need to save. Your goal should not be to save enough money to live on after you retired. Your goal should be to save up enough to create a passive income that provide you with the money you need each year without the need to ever sell any assets. This way your money will keep rolling in regardless of how long you live.
If we again assume that you need 60 000 a year to live on and that you can build a portfolio that give you a 4% dividend return each year then you would need 1 500 000 to reach your goal.
You see that the difference is not that big, only 300 000 but in the first example you will eventually run out of money while the other examples will keep providing for you regardless of how long you live. By saving a little more you can eliminate all lot of the stress and anxiety from your retired life.
If you are unable to save 300 000 extra you might be able to work 2-3 years extra and reinvest the returns to reach your goals.
Best option
I think the best option when saving for your retirement is to invest long term in high yield dividend stock. They will give you a high passive income that will grow larger year over year. Your goal should be to buy stock in companies that are well established on the market and that have a bright future a head of them. Your investment horizon should be at least 10 years but your goal should be to never sell a stock once you bought it. You should always re-evaluate your position regularly but your goal should always be to buy stock that you can keep the rest of your life. You can read more about dividend stocks here.
Avoid
Always avoid the following investment when you are saving for your retirement.
Annuities
Annuities are a very expensive way to invest and is not good for any one but the company that sold you the annuity.
Binary options
Binary options are not an investment. They are high risk instruments meant for short term speculations and should never be part of your investment strategy.
CFD Certificates
CFD certificates are very high risk and should be avoided when you save for your retirement. They can however be very valuable tools if you are a day trader.
Penny stock
Always limited the amount of penny stock you include in your retirement portfolio. I recommend that you avoid them altogether but I know that some investors prefer to include them due to the hope that they will increase in value. If you do invest in penny stock then you should keep your investments below 10% of the total value of the portfolio.