Everybody wants a sweet and relaxing retirement, waking up every morning without any financial worries. Imagine traveling on that dream vacation without thinking about the cost or buying the home of your choice no matter the cost. All these thoughts are what come to mind when you think of your retirement.

However, most times these your imaginations might not come to past as a result of some of your decision earlier in life. Some of these might include starting your retirement investment too late or not starting at all, investment in the wrong industry, and so on.

To help you eliminate all these unwanted eventualities, this article is geared at helping you prepare well for your retirement with the right investment. Believe it or not, now is the time to start your retirement investment no matter your current age or financial status. So read on for some tips and ideas.

• What is a Good Strategy to Invest for Retirement?
• What Percentage of Your Income Should you Invest for a Retirement Plan?
• How Should I Invest my Lump Sum for Retirement?
• Where to put Your Money After you Retire?

What is a Good Strategy to Invest for Retirement?

Investing for your retirement is very important if you want to retire without worries. However, more important is investing in the right retirement investment. The internet and your financial adviser will have some options ready for you to choose from, but it is good for you to have an idea of some of the best retirement investment at the moment.

Read Also: Should You Put Extra Income Toward Debt or Retirement? We do the Math

Find some of the strategies you can use to get the right retirement investments below.

1. Construct a Total Return Portfolio

One common way to create retirement income is to construct a portfolio of stock and bond index funds (or work with a financial advisor who does this).

The portfolio is designed to achieve a respectable long-term rate of return, and along the way, you follow a prescribed set of withdrawal rate rules that will typically allow you to take out 4-7% a year, and in some years, increase your withdrawal for inflation.

The concept behind “total return” is that you are targeting a 10- to 20-year average annual return that meets or exceeds your withdrawal rate. Although you are targeting a long-term average, in any one year your returns will deviate from that average quite a bit.

To follow this type of investment approach, you must maintain a diversified allocation regardless of the year-to-year ups and downs of the portfolio.

You take withdrawals using what is called a systematic withdrawal plan. Be cautious of how you project your potential results—when regular withdrawals are coming out in retirement the sequence of market returns can affect your outcome.

There are many variations to a total return investment strategy such as time segmentation and asset-liability matching, where safe investments are used to meet near-term cash flow needs, and growth-oriented investments are used to fund future cash flow needs.

2. Use Retirement Income Funds

Retirement income funds are a specialized type of mutual fund. They automatically allocate your money across a diversified portfolio of stocks and bonds, often by owning a selection of other mutual funds.

The investments are managed with the goal of producing monthly income which is distributed to you. These funds are constructed to provide an all-in-one package that is designed to accomplish a particular objective.

Some funds have an objective of producing higher monthly income and may use some principal to meet their payout targets. Other funds have a lower monthly income amount combined with a goal of preserving principal.

With a retirement income fund, you retain control of your principal and can access your money at any time. Of course, if you do withdraw some of your principal, your future monthly income will subsequently go down.

3. Immediate Annuities

All annuities are a form of insurance rather than an investment. Their purpose is to produce income and that is what you need in retirement.

With an immediate annuity, you are ensuring your future income. In exchange for a lump-sum payment, the insurance company is providing you guaranteed income for life (or for some other agreed upon time frame). The guarantee is as strong as the quality of the insurance company that issues it.

There are fixed immediate annuities as well as variable immediate annuities. Some offer income that will increase with inflation, although that means you’ll start out receiving a lower monthly amount.

You can also choose the term of the annuity, such as a 10-year payout, a joint life payout (appropriate if you are married and want income for either of you that may be long-lived) or a single life payout.

Immediate annuities can be a good solution for those who don’t have many other sources of guaranteed income, for those who tend to be over-spenders (meaning they may spend a lump sum of money far too quickly and then have nothing left) and for single folks with long life expectancies.

4. Buy Bonds

When you buy a bond, you loan your money to either the government, a corporation or a municipality. The borrower agrees to pay you interest for a set amount of time and when the bond matures your principal is returned to you. The interest income, or yield, you receive from a bond (or from a bond fund) can be a steady source of retirement income.

Bonds have quality ratings to give you an idea of the financial strength of the issuer of the bond. There are short-term, mid-term, and long-term bonds. There are also bonds with adjustable interest rates, called floating rate bonds, as well as high-yield bonds, which pay higher coupon rates but have a lower quality rating.

Bonds can be purchased as a package in the form of a bond mutual fund or bond exchange-traded fund, or you can buy individual bonds.

In retirement, individual bonds can be used to form a bond ladder with maturity dates set to match your future cash flow needs. This investment structure is often referred to as asset-liability matching or time-segmentation.

The principal value of bonds will fluctuate as interest rates change. In a rising interest rate environment, you can expect existing bond values to go down.

If you plan on holding the bond to maturity principal fluctuations won’t matter. If you own a bond mutual fund and need to sell it to use the funds for living expenses, principal fluctuations will matter.

5. Rental Real Estate

Rental property can provide a stable source of income, but there will be maintenance requirements, and when you own real estate, you will inevitably incur unanticipated expenses.

Before you buy rental property you need to calculate all the potential expenses you may incur over the expected time frame you plan to own the property. You also need to factor in vacancy rates—no property will be rented 100% of the time.

Investment property is a business, not a get-rich-quick proposition. For those with real estate experience, or those who want to put the time in to make it a business rental real estate can make a great retirement investment.

Don’t go out and start investing in real estate without doing your homework. People jump on the real estate bandwagon simply because they knew a friend or neighbor who did very well with real estate.

Your friend or neighbor may have knowledge or experience that you don’t have. Getting into an investment because someone else was successful with it is not the right reason to do it.

6. Variable Annuity With a Lifetime Income Rider

A variable annuity is not the same type of investment as an immediate annuity. In a variable annuity, your money goes into a portfolio of investments that you choose.

You participate in the gains and losses of those investments, but for an additional fee, you can add guarantees, called riders. Think of a rider like an umbrella—​you may not need it, but it is there to protect you in a worst-case scenario.

Riders that provide income go by many names such as living benefit riders, guaranteed withdrawal benefits, lifetime minimum income riders, etc. Each has a different formula that determines the type of guarantee being provided.

Variable annuities are complex, and many of the people who offer them don’t have a good grasp of what the product does and doesn’t do. Riders have fees, and frequently have variable annuities with total fees running about 3-4% a year. That means to make any money the investments have to earn back the fees and then some.

An annuity is an insurance product. Thoughtful planning needs to be done to determine if you should insure some of your income.

If the answer is yes, then you must figure out what account to purchase the annuity in (an IRA or by using non-retirement money), how the income will be taxed when you use it, and what happens to the annuity upon your death.

Proper planning should be done before the purchase of variable annuities. Unfortunately, all-too-often the annuity is purchased because someone had cash and a salesperson suggested they put their cash into a variable annuity product. That is not financial planning.

7. Keep Some Safe Investments

You always want to keep a portion of your retirement investments in safe alternatives. The primary goal of any safe investment is to protect what you have rather than generate a high level of current income.

All retirees should have a reserve account (an emergency fund). This account should not be included as an asset available to produce retirement income. It is there as a safety net; something to turn to for unforeseen expenses that may come up in retirement.

Also, if you are not sure what to do with your money, park it in a safe investment while you take the time to make an educated decision. Too many people rush to put their money into an investment because they feel like it should not be sitting in the bank for too long. They end up making a rash decision, which is never a good idea.

Making thoughtful, well-informed investment decisions takes time. While you are educating yourself or interviewing advisors it is perfectly okay to park your money somewhere safe.

No reputable professional is going to pressure you into making a quick investment decision. If you’re feeling pressured you may not be dealing with someone who has your best interests in mind.

8. Income Producing Closed-End Funds

The majority of closed-end funds are designed to produce monthly or quarterly income. This income can come from interest, dividends, covered calls, or in some cases from a return of principal.

Each fund has a different objective; some own stocks, others own bonds, some write covered calls to generate income, others use something called a dividend capture strategy. Be sure to do your research before buying.

Some closed-end funds use leverage—meaning they borrow against the securities in the fund to buy more income-producing securities—and are thus able to pay a higher yield. Leverage means additional risk. Expect the principal value of all closed-end funds to be quite volatile.

9. Dividends and Dividend Income Funds

Instead of buying individual stocks that pay dividends, you can choose a dividend income fund, which will own and manage dividend-paying stocks for you.

Dividends can provide a steady source of retirement income that may rise each year if companies increase their dividend payouts—but in bad times, dividends can also be reduced, or stopped altogether.

Many publicly traded companies produce what are called “qualified dividends” which means the dividends are taxed at a lower tax rate than ordinary income or interest income.

For this reason, it may be most tax-efficient to hold funds or stocks which produce qualified dividends within non-retirement accounts (meaning not inside of an IRA, Roth IRA, 401(k),

10. Real Estate Investment Trusts (REITs)

A real estate investment trust, or REIT, is like a mutual fund that owns real estate. A team of professionals manages the property, collect rent, pay expenses, collect a management fee for doing so, and distribute the remaining income to you, the investor.

REITs may specialize in one type of property, such as apartment buildings, office buildings, or hotels/motels. There are non-publicly traded REITs, typically sold by a broker or registered representative who receives a commission, as well as publicly-traded REITs which trade on a stock exchange and can be bought by anyone with a brokerage account.

When used as part of a diversified portfolio, REITs can be an appropriate retirement investment. Due to the tax characteristics of the income REITs generate, it may be best to hold this type of investment inside a tax-deferred retirement account such as an IRA.

What Percentage of Your Income Should you Invest for a Retirement Plan?

There has been a lot of speculations as to how much of your income should go to your retirement plan. However, there are different factors you need to consider when deciding how much to invest. Think of how you want to spend your retirement and have an idea of how much it might cost you.

A lot of financial experts have also provided there suggestions and tips to help you make an informed decision.

Eric Dostal, J.D., CFP®, vice president at Wealthspire Advisors says that any calculation for retirement is an educated guess. “Saving for retirement is likely not the only financial goal you have on your plate,” where there are things like opening a business or buying a home that you might be considering, he says.

What is possible, however, is to follow some key rules. For instance, you could assume that you’ll have a steady income until age 65. That’s exactly what drives many of the leading theories. Let’s examine some of the theories below.

A Key Study

The Center for Retirement Research at Boston College looked at how many people have to save to achieve a replacement rate of around 80%. That’s the replacement rate needed to retire at a comfortable level, say the study’s authors, center director Alicia H. Munnell, and her associates Anthony Webb and Francesca Golub-Sass.

The figures varied depending on whether someone was replacing an income that was low (80% replacement rate needed), middle (71%), or high (67%).

They found that individuals earning the average wage would have to save 15% of their earnings every year to meet a 80% replacement rate at age 65. The biggest factor in the calculations was an individual’s age—when they started saving and when it ended.

Start saving at 25 and you only need to earmark 15% of your annual salary to retire at 65, and if you wait until 70 to retire, you’d only need to save 7% annually.

The savings rate is much higher for those that start saving later. If you waited until age 45 to start saving, you would need to put aside 41% of your salary for retirement.

For example, a 25-year-old saving $5,000 annually for 43 years, achieving an average annual return of 8% on their investments will have $1.67 million at retirement, says Peter J. Creedon, CFP®, CEO of Crystal Book Advisors.

Someone waiting until age 35 to start saving and only having 33 years to contribute to—at $5,000 a year and an 8% return—would have $730,000, he says.

Another Study

In another study, Wade D. Pfau, CFA, professor of retirement income at the American College, found that historical data over nearly the past century indicate that a person would have to save 16.62% of their salary to retire 30 years after beginning the savings plan with enough money to fund a replacement rate of 50% from their “accumulated wealth.”

Unlike the Boston College researchers, Pfau didn’t include Social Security income or “any other income sources” in his 50% calculation. Adding in Social Security and, say, pension income would move the replacement rate significantly higher.

So what is the point from all these expert theories?

There is no one-size-fits-all answer to how much you for retirement, but academic studies based on historical data can give you a ballpark figure. Aim to save around 15% of your annual salary if you’re early in your career.

If you make $50,000 per year, save $8,000 per year or about $666 per month. This alone might seem like a tough task, but take advantage of employer matching and find new ways to reduce expenses.

One of the big keys is that if you wait until later in life to start saving, you’ll need to put away more of your salary. The sooner you start the better. 

How Should I Invest my Lump Sum for Retirement?

Whether you received your lump sum from investments, a big lottery windfall or a pension you worked so hard all your life for, it’s a wise decision to start thinking how you should invest this lump sum for your retirement years.

Fortunately, when it comes to a lump sum cash investment, you have many choices. But first, you need to decide if you want to invest the entire lump sum at once, or bit by bit.

You can opt for investing your lump sum in mutual funds, annuities or even real estate. But each has its own pros and cons that must be weighed before making a fiscally responsible decision that is the best lump sum investment for retirement and your situation.

Dollar-Cost Averaging Vs. Lump Sum

If you have contributed to a 401(k), then you are already familiar with dollar-cost averaging and may not even know it. Dollar-cost averaging is when you invest a fixed sum of money in a stock or fund over time. These fixed investments are made at regular intervals, regardless of how the market is performing at the moment.

Because your regular investments will purchase the same stock at different prices, over time, the cost per share will average out which spreads the risk over time, making this strategy helpful if you’re new to investing or are risk-averse.

Lump sum investing, on the other hand, is a strategy whereby an investor will take a lump sum of money and invest it all at once. If the market takes a turn for the worse after you invest, your portfolio could take a big hit, but more of your money will be able to grow or compound when you invest it as a lump sum.

Consulting with a financial advisor can help you determine your level of comfort with risk and whether or not you should invest the lump sum all at once.

Mutual Funds Investments

Mutual funds are one way to invest a lump sum in retirement by pooling financial investments from its investors and using that money to then purchase securities. These securities can be in many different investments along various avenues including stocks and bonds.

Also known as holdings, securities make up what is known as the mutual fund’s portfolio. When you purchase shares of mutual funds, you have part ownership in the fund, and are thusly entitled to your representative portion of the income that is generated through the fund’s securities.

Mutual funds are popular lump-sum investments for lots of reasons, including their high level of liquidity. You can redeem your shares whenever you’d like for the current net asset value, or NAV, but bear in mind, however, that you will likely face redemption fees which vary depending on the investment company.

Mutual funds are also an affordable way to diversify your portfolio. Because mutual funds invest in many different companies across many different industries, your risk is spread out should one company experience a downturn, and many mutual funds have low initial investment requirements.

As with any type of investing, mutual funds do carry a level of risk. Even though mutual funds are diverse enough to weather some financial storms, you need to be aware that you could still lose a portion or all of your investment if the securities or holdings in a particular mutual fund should experience a downturn.

Check a fund’s past performance to get an indication of how stable it has been and exercise caution when investing in funds that have exhibited excessive past volatility as this is indicative of an increase of risk.

Investing in Immediate Annuities

Another popular choice for retirees looking to invest a lump sum in their retirement years is the immediate annuity. Annuities are an insurance product purchased from insurance companies and provide long-term stability.

While there are several different types of annuities available, the immediate annuity lets you make a lump-sum premium payment for a policy in exchange for guaranteed distribution payments. These distribution payments can last for 10 or 20 years or for as long as you designate, even for the rest of your life.

Annuities funded by tax-deferred accounts are only taxed on the distributions as you receive them, rather than all at once. This allows more of your money to grow tax-deferred until you begin taking distributions which means that more of your money can be put to work for you. 

Immediate annuities are popular with retirees because after your lump sum premium is paid, you can begin to take distributions almost immediately.

There are fees, however, associated with the purchase of annuities, such as broker or commission fees which can range as high as 10 percent depending on the company from which you purchase the policy. You also may have to contend with surrender charges.

Surrender charges are fees that you could face for taking money out of an annuity after you purchase it. To be sure you know what to expect as far as the fees associated with your annuity are concerned, you need to speak with a financial advisor or your broker so that you fully understand your policy.

Real Estate Investments

When you’re retired, chances are you want to enjoy your golden years without having to worry about how your money will fare with the ever-present threat of inflation.

Fortunately, investing in real estate gives you the benefit of a diversified portfolio, and depending upon the type of real estate investment, it could also help your retirement funds keep up with inflation.

There are several real estate investment options available to you, with two popular choices being the purchase of private mortgage lending pool shares or directly purchasing real estate.

If you are considering investing a lump sum in real estate, you may want to look into private mortgage pools that provide people who flip properties with the funds to purchase, fix and resell properties. This investment helps you avoid the common pitfalls of real estate flipping, especially if you aren’t familiar with how the process works.

Investing in a private mortgage pool alleviates the hassle and financial hit of having to hold onto a property for longer than you planned, or underestimating renovation costs. Your investment is spread among hundreds of deals so you aren’t putting yourself at the same risk as you’d face if you were flipping single properties yourself.

If you are more of a hands-on investor, then purchasing a property and flipping or renting it yourself could be what you’re looking for. This is known as direct investment. 

Purchasing a property is another popular choice for lump sum investing because you can obtain investment property with relatively little money in comparison to your potential return of income, or ROI. 

Read Also: What is The Normal Amount to Have for Retirement Savings?

Direct investment is not without its inherent risks, but the good news is that real estate does tend to keep up with inflation that threatens to reduce your buying power as you get further along in your retirement years.

Where to put Your Money After you Retire?

When you invest for retirement, you typically have three main options:

1. You can put the money into a retirement account that’s offered by your employer, such as a 401(k) or 403(b) plan. These plans are great deals because the money will grow tax-free until you withdraw it in retirement. What’s more, you escape taxes either on the money you put into the plan or the money you withdraw from the plan, depending on whether you choose a traditional or Roth option.
2. You can put the money into a tax-advantaged retirement account of your own, such as an IRA. IRAs offer similar tax breaks to 401(k)s, though some of the eligibility rules differ.
3. You can put the money into a regular investment account that doesn’t have tax advantages.

The first two options are far better deals, but there are limits on how much money you can put into them each year.

If you’ve put all the money you’re allowed into tax-favored plans and you want to save even more for retirement (for example, because you got a late start in saving and need to make up for lost time), you’ll have to use a regular investment account.

Finally

With all the information provided above about a retirement investment, some points standout that you should pay attention to. First, the best retirement investment comes when you start early no matter your income. Secondly, its is important to do your research and choose the best investment for you even though you find different opinion online.

So what should you do now? Start a retirement investment today from any of the options we provided above. You will surely enjoy your retirement.