Retirement Investing Guide: The Importance of Growing Your Retirement Savings

Now that you have started saving for retirement, this retirement investment guide will help you understand and decide how to maximize your retirement savings.

Published Aug. 26, 2020

Reading Time: 6 minutes.

Building a “golden” nest egg is any future-retirees ultimate goal. Yet, it’s nearly impossible to achieve through savings alone. That’s why investing in conjunction with your retirement goals is important. You might think that saving will be enough for retirement. It isn’t. Inflation plays a key role in increased living costs, and if you are still decades away from retirement, what you are saving now won’t be worth much when you actually need it. After years of ongoing contributions to your retirement savings account, the greatest driver of your retirement savings becomes the growth of your investment portfolio. To guide your investing, dedicate time to establish a planning strategy focused on retirement investment growth that will pay off in the future. As your assets grow, both by increasing your income and your savings, the compounding effect of investing can make a big difference. 

Make Sure You Have Your Affairs In Order

Before you begin evaluating the best ways to invest and grow your retirement nest egg, make sure you’ve solidified your earning capacity and implemented strong savings habits. Additionally, have an emergency fund and a plan to tackle any debt you might have. You don’t want to be investing money without having any funds to tap into in case of unexpected expenses or if you’re actively experiencing mounting debt

A common rule of thumb is to have three to six months’ worth of living expenses in your emergency fund. Automatic transfers are your best friends when it comes to allocating your income. If you have high-cost debt, it is better to deal with it before investing. Otherwise, you might be able to invest and pay down loans simultaneously. But you need to have a holistic financial plan laid out to guide you. 

How And Where Do I Invest for Retirement?

This depends on whether you have access to an employer-sponsored plan. Most times, this will  be in the form of a 401(k) or 403(b). Employers will assemble different investment options for you. The money you contribute is not taxed until you withdraw it in retirement. Take advantage of matching contributions if that is something your employer offers. They match a certain amount of your contribution. the more you put in, the better the return. 

However, not every retirement savings plan will be right for you. Some plans might offer low-quality investments for high fees. If this is the case, it might be useful if you save enough to get matched but invest in another type of account. Remember that there are limits on how much you can contribute per year and rules around withdrawals. Download a free copy of our retirement investing guide, The Road to Retirement, to learn more about how and where to invest. 

What Is Diversification?

Diversification refers to the risk management strategy of including various types of investments and assets within a portfolio. You will have to make a decision with regards to your asset allocation, meaning how you will divide your investments among stock, bond, and other funds. Usually, the younger you are, the more risks you can afford to take. Which means you might feel comfortable investing more in stocks. Stocks have the potential to generate more growth over time, so it’s always best to avoid timing the market. While bonds, on the other hand, are far less risky. 

Diversification provides the long-term growth necessary to hedge inflation and reduces the volatility of the equity portion to its lowest limit. A well-balanced investment portfolio reduces risk. It means spreading your retirement investment growth across different sectors and securities. Diversification also depends on your retirement risk tolerance and risk capacity. 

Assessing Your Retirement Risk Tolerance and Risk Capacity

Before you start investing, you must assess your investing risk threshold. It follows the idea that the more you risk, the greater your potential earnings. But also the losses. Rutgers University has a quiz to help guide you to find your threshold. Even employer-sponsored plans require you to choose among different options. 

Assessing your risk tolerance should be an honest and practical self-assessment. It depends on your financial circumstances and the type of person you are. Ask yourself:

  • How much money are you willing to lose? 
  • Will your investments keep you awake at night? 
  • What is your idea of retirement? 
  • Are you saving for other significant life events (kids going off to college or buying a house)? 

Determining your situation and goals is the first step in building a portfolio. They will guide your investments and general strategy. It is based on how much you can set aside and how soon you want to access your returns. You might consider your age, future income needs, and how much time you have to grow your investments. A single 24-year-old has different needs to a 45-year-old. Below are some explanations of different levels of tolerance.

  • You have a high level of risk tolerance if you take risks and are optimistic about your investments. You are ok with investing in lesser-proven stocks or investments that could be big but could also dip unexpectedly. 
  • You have a moderate level of risk tolerance if you can tolerate risk to some extent. You prefer investments that are likely to produce gains over time but may also drop. 
  • You have a low level of risk tolerance if you are uncomfortable with any risk. You prefer more conservative products such as consumer goods stocks, utilities, and bonds. These will generate moderate gains but are less likely to drop. 

Growth And Value Investing

Investing is a long-term strategy for long-term goals, like retirement. Even if your investment falls and rises at any given point, it will gain back its losses over time. What you invest in, matters. Are you investing in growth or value? There is a common difference.

  • Growth investments happen in companies that are expected to grow fast. They are riskier, as they offer higher expectations and experience greater stock price swings. The goal of growth investments is to sell at a higher price than you paid. Common growth investments include stock mutual funds, Exchange-Traded Fund (ETFs), and stocks. 
  • Value investments seek companies whose share price is considered a bargain. The market will recognize the value in time and the price will rise. They don’t emphasize growth, but investors still benefit, so can be safer investments.

It might also be worthwhile for you to consider income-producing investments. These provide regular earnings and can be a great addition to a balanced portfolio. They include bonds, real estate, dividend stocks, and business investments. 

Where Do I Start?

A financial advisor is the best starting point for retirement investment growth. They can provide a mapped retirement investment guide and assess you with risk tolerance. An advisor will even be able to lead you through managing your debt or saving for a specific reason, while also growing your retirement investments.

The Key To Growing Your Investments: Time

Even if the situation becomes extremely volatile, your investment plan is designed to withstand it. Don’t jump off the wagon at the first sign of trouble. Be flexible and refine your plan over time. Let it adapt to life’s curveballs. You might receive an inheritance, have your kids move out, or buy a second home. Whatever your situation, you are in charge of your growth. 

The key is in touching your investments as little as possible. Evaluate if you can save more from your paycheck and increase your investments. Reconsider and rebalance said investments. Make sure you are optimizing your retirement investment growth. Working with a financial advisor is useful even after you retire. They can help to efficiently make withdrawals once you reach retirement age.

In this series, we’ll dive deeper into each of these phases and how they relate to your unique retirement planning journey. To identify which phase suits you best at this point in your life, as well as to learn actionable frameworks and strategies, download your free copy of our latest cost-free guide, The Road to Retirement

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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