How to Invest for Retirement

Retirement may seem like a long way off for many, but that doesn’t mean it’s too early to start thinking about it. In this article, we examine the importance of saving for retirement, highlight some key considerations, explain how to invest for retirement and provide some useful tips.

When to Start Saving for Retirement 

Although many people may think they’re too young to start saving for retirement, the reality is that it’s never too early to start investing for your future.

In fact, the earlier you start the better. If you start investing for retirement at a younger age, you will give your money more opportunity to grow, which will help make it easier in the long run.  

Even seemingly insignificant payments, when made regularly over a long period can blossom into a significant sum over time. However, if you’re one of the many getting a later start, don’t worry. Just like it’s never too early to start, it’s also never too late.  

How Much to Save for Retirement 

Whilst it’s easy to make a blanket statement saying that it’s better to start investing for retirement as early as possible, there is no such easy answer to the question of how much to save for retirement. 

Different people will need different amounts depending on the lifestyle they plan to live. This is something which it is important to consider when you start planning for retirement, which we will look at in the following section.  

What to Consider When Investing for Retirement 

When investing for retirement, there are a few things you should consider before you get started. In the following sections, we will highlight several questions you should ask yourself. 

How Much Do You Need to Save for Retirement? 

Think about how much you will need to sustain your desired lifestyle when you retire, set yourself a goal and make provisions to save towards this goal. Having a clear goal in mind will help by giving you something to work towards. 

If you’re unsure of how much you’ll need and want some guidance, there are resources available online which might be able to help you. For example, the Retirement Living Standards help give an idea of how much UK citizens will need in retirement for a number of different living standards.

When Do You Want to Retire? 

Having an idea of when you want to retire will not only help you understand how much to save for retirement but will also let you know how long you have in order to achieve that goal.  

If you live in a country which provides a state pension, you will need to reach a certain age before you are eligible to start claiming. For example, in the UK, those born after 6 April 1978 will reach state pension age on their 68th birthday. 

However, if you are making your own provisions in addition to a state pension, you may be able to retire earlier than the state pension age. 

What Are Your Retirement Investment Options? 

Besides a state pension, which is typically funded from tax payments made during working years, many countries offer the ability to pay into a private or workplace pension. 

In some countries, there are certain tax advantages to paying into a private or workplace pension which make this an attractive method of investing for retirement. However, under these schemes, you will need to reach a minimum age before you are able to withdraw funds. 

Some people may desire more flexibility with their retirement savings in which case it may be preferable to open an investing account with a broker in addition to, or instead of, paying into a private or workplace pension. 

How to Invest for Retirement

For those investing for retirement via a private pension or an investment account with a broker, you will need to decide what assets you want to invest in.  

Before making any such decisions, it’s important to educate yourself on the options available to you, the potential rewards, the risks and the costs involved. Your attitude to risk in particular will have a big influence on the options available to you. 

Risk vs Reward 

Whereas younger people are likely to be more comfortable taking on a higher level of risk, the closer people are to retirement, the more risk averse they are likely to be. Generally speaking, investments which have higher potential returns will also be accompanied by a higher level of risk.  

Those who only want to take on the lowest level of risk may be inclined to save for retirement using an interest-bearing savings account. However, it’s important to bear in mind that such accounts may struggle to keep pace with inflation meaning that, although the amount of money in your account may increase, the value of that money is at risk of decreasing over time. 

Stocks vs Bonds 

When it comes to investing, the two asset classes which tend to spring to mind are stocks and bonds. Of the two, stocks tend to come with higher risk and higher reward than bonds and, consequently, many investors choose to build a portfolio which consists of the two. 

Younger investors may choose to construct a portfolio with a higher, or even complete, exposure to stocks and can rebalance their portfolio the closer they get to retirement to adjust their risk exposure. 

Instead of individual stock and bond picking, investors should also consider investing in mutual funds or Exchange-Traded Funds (ETFs), which can provide instant diversification and exposure to a wide range of assets with a single investment. 

Investing for Retirement Tips 

We’ll end this article with a few tips to help you get started with your retirement investing. 

Start Early 

We already said it, but we’ll say it again. It pays to start saving for retirement as early as possible.   

The earlier you start the more time your money has to grow and to take advantage of the compounding effect, whereby investors earn returns on their returns. Over the long-term, compounding returns can make a big difference in terms of wealth creation. 

Furthermore, remember that any money invested is at risk. The earlier you start investing for retirement, the more time you will have to recover from any unexpected setbacks or losses. 

Make Regular Contributions 

Work out how much you can afford to contribute to your investments each month and make sure you stick to it. If possible, automate this payment so that happens each month without even thinking about it. Review your contributions regularly to see if you can afford to do more. 

Pay Attention to Fees 

As well as potentially incurring commissions when you buy and sell assets, if you invest in mutual funds or ETFs you will incur an annual management fee, which is usually charged as a percentage of your total holding. 

These fees may not sound like a lot in percentage terms, but they can add up to a substantial sum over the years. Furthermore, they get charged regardless of how the investment performs. Consequently, it can be worthwhile to shop around and make sure you are not paying more than you have to.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.