A good time to begin saving for retirement is as soon as you enter the working world. You might start out by only setting aside a few dollars a week, but the important thing is to get into the habit early and make retirement savings a regular part of your monthly budget throughout your professional life.
One of the most popular ways to start saving for retirement is through a company-sponsored plan such as a 401(k). With this type of plan, your contribution is automatically deducted from your paycheck, which means you don’t have to think about it. Contributions are also pretax, which reduces your taxable income. Finally, if you get matching contributions from your employer, you’re essentially getting free money.
But you shouldn’t depend on 401(k)s or individual retirement accounts alone to fund your retirement. There are other ways to invest that involve less risk while providing steady returns.
An obvious option is to simply park some of your money into a savings account that pays a higher-than-average interest rate. Beyond that, you have numerous choices that can help provide steady income streams.
Here’s a look at five ways to invest for retirement to help build financial security for your golden years.
Bonds are one potential retirement investment, especially if you buy U.S. treasury securities backed by the full faith and credit of the federal government. You might not get the biggest payoff with treasuries, but you can depend on them to provide some kind of return because the U.S. government has never defaulted on a debt obligation.
In addition to U.S. treasuries, other bond options include municipal bonds, corporate bonds, mortgage-backed securities and bonds that originate in overseas markets. Bond yields vary based on the credit quality of the issuing entity, the length of maturity, market conditions, and interest rates set by the Federal Reserve. If you don’t want to buy individual bonds, you can invest in professionally managed bond funds to help diversify your bond portfolio.
As a bondholder, you’ll receive periodic income payments from the issuer based on the annual yield that was effective at the time of purchase. If you hold the bond until it matures, you’ll be repaid the principal by the issuing entity. Another option is to try and sell bonds on the open market prior to maturity.
Money Market Funds
Money market funds are another investment that work like mutual funds, except that the money is invested in short-term assets such as bonds, treasuries and certificates of deposit. Many money market funds are typically bought from brokerages, financial services firms, banks, and investment companies. You will earn a variable interest rate based on how the investments perform.
Fixed annuities are financial products that pay out a fixed amount in a series of payments. One of the biggest advantages of fixed annuities is that they provide a guaranteed source of income for a set period of time, making them a popular choice as you approach retirement age.
One way to invest in stocks and receive periodic payments is to find companies that pay regular dividends, usually once a quarter. This may reduce the risk of share price fluctuations because you are guaranteed some kind of income as long as the company continues paying the dividend.
A dividend is a payout that a company makes to shareholders. Dividends usually are paid in cash four times a year, but not all stocks pay them. Younger, faster-growing companies tend not to pay dividends because they need to use their cash flow for further expansion. You’re more likely to earn dividends by investing in larger, more established companies with regular and predictable cash flows.
Some companies also offer a special dividend based on unusual circumstances such as a blowout financial quarter, though you shouldn’t depend on these. Stock dividends vary with each payout period. Sometimes companies discontinue their dividend payments, though some companies have built a decades-long record of paying dividends.
Publicly traded real estate investment trusts give you an opportunity to invest in real estate without having to buy a property yourself. These may carry less risk than other types of real estate investments and also allow you to diversify your portfolio. Keep in mind that changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.
A REIT is a corporate entity that owns, operates or finances income-generating real estate. Publicly-traded REITs are listed on major stock exchanges, so you can buy and sell them the same way you would with any other stock. REITs typically own a portfolio of properties, including apartment complexes, commercial real estate, shopping malls and other assets.
REITs also often pay dividends, giving you a regular source of income in addition to any potential gain you might realize from stock price appreciation.
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