Despite what many websites will tell you, there is no single recipe to successfully investing for retirement. Whether or not your retirement is comfortable depends on first identifying your individual retirement goals and time horizon, and then finding the proper balance of investments to accomplish your goals. These factors and your current financial situation will in large part determine whether you should focus on growth, income or a combination of the two to sufficiently fulfill your financial needs.
Yet, we believe that as much as 70% of the potential return on your retirement investments depends not on the specific security you invest in, but rather on the types of securities you choose—called your asset allocation. Your portfolio’s asset allocation is the key to understanding your potential for gain and your specific risks. Additionally, how these investments are made can significantly impact their ability to fund your retirement. For example, if the same mutual fund can be bought through an annuity, 401(k), Roth IRA or a standard brokerage account, then the difference between the accounts’ individual fees and taxes affect how much of the fund’s gains you get to keep.
The array of investment vehicles available can make investing for retirement bewildering for the inexperienced investor. As a firm serving more than 35,000 private clients1 , Fisher Investments has extensive experience in understanding how these numerous options can be assembled to support a wide range of goals. We’re offering this guide to help investors understand the basics. We’ll take a look at a few of the main options for retirement investments, from different types of securities to tax-advantaged accounts.
A security is any type of negotiable financial instrument, such as a bond, stock share, mutual fund or options contract. In fact, the word “security” has its origins in pre-digital days, when investors would receive a paper “security” certificate as proof of their investment. Though the technology that tracks them has evolved, securities remain the top vehicle people use to invest for their retirement.
Securities come in myriad forms—far too many and many too specialized to offer a comprehensive list here. However, there are some key types you’re likely to come across when deciding how to invest for your retirement:
Investing in real estate can be a good way to generate income. However, investing in this sector can be more complicated than simply putting money into bricks and mortar. For example, real estate can encompass other investment vehicles such as stocks in apartment-management companies, bringing additional and more complex risks. With so many ways to invest in this area, it’s important to consider how much exposure you already have when considering new investments.
Of course, simpler real estate investments can provide good returns, such as cash flow from rentals and/or price appreciation that can be leveraged (think taking out a home equity loan). But there are many expenses to consider, including repairs, maintenance, property taxes, mortgage interest, management fees, legal fees and more.
Alternatively, when investing for retirement, you could choose a Real Estate Investment Trust (REIT). Similar to mutual funds, REITs are companies owning or financing real estate through pooled funds to produce an income for the fund owners. REITs can provide investors with regular income streams and long-term capital appreciation. Because their prices often respond to shifts in the economy differently than stocks, REITs are often sold as a diversification tool. But, as we’ve mentioned, this may not be needed depending on how the rest of your portfolio is invested. Investors should check how their other investments expose them to changes in the real estate market when considering if this is the right tool for their diversification.
After gaining an understanding of the risks and rewards associated with various types of investments, it’s helpful to look at potential benefits of some specialized accounts when investing for your retirement. While they come in numerous forms, the defining feature of these accounts is their particular tax advantages. The most common types encountered by typical investors include:
No matter which type of account you use when investing for your retirement, remember that the power of compound interest means the single biggest way to maximize your returns is to invest big and to invest early—your aim should be to max out the accounts available to you as early as your situation allows.
Annuities are often sold as retirement investment vehicles that can achieve market-like returns with little or no risk. Technically, annuities are types of insurance contracts in which the insurer invests on your behalf, meaning annuities function a bit differently than typical securities like stocks or bonds. They can be purchased through other retirement accounts like a security, but also are used themselves to purchase securities. As you may have guessed, the nature of annuities is complex, so they should be considered with caution. In many situations, we believe investors could find more cost-effective means to gain comparable benefits while investing for their retirements.
The main value of annuities lies in the ability to shift the risk of outliving your assets onto the insurer. Annuity salespeople often highlight the tax advantages offered by annuities, as they allow funds to grow tax free similar to the benefits offered by other retirement accounts. However, annuities (particularly variable and indexed varieties) often charge significantly higher fees than other investment plans. This often creates a strong headwind against your investments, which can limit the gains annuities can make.
Moreover, annuities often come with contracts thicker than some dictionaries. While the benefits promised for many annuities are often grand (e.g., “guaranteed return,” “protection from loss”), the terms and conditions that define them may not always be as expected or in the best interests of investors. Often the features appearing to be most attractive are optional “riders,” which actually serve to add to the annuity’s already considerable annual cost.
While it is possible, through careful selection of the interest terms and riders, to find annuities that are relatively low-risk, generally this comes with the trade-off of lower returns. Take so-called fixed-index annuities, which offer not only a minimum return (usually roughly the going inflation rate) but also the chance to enjoy one that is potentially higher, when there is growth in an underlying stock index. You might assume this lets you have your cake and eat it, too—but the rate of return on the index relative to the annuity is rarely one-to-one. When the index is rising, you’ll enjoy only a certain percentage of the gains, often well below the index’s actual performance. And while the “floor” rate may provide some protection when the index is dropping, they tend to be only a few percent, which is often not enough to overcome factors like inflation that can reduce the purchasing power of your investments.
Investing for retirement should be a crucial part of every American citizen's journey. Getting it right is about understanding your investment goals, income needs and time horizon, then finding the right retirement investments to achieve them with the least risk. Too often investors jump headlong into picking mutual funds and other securities or blindly diversifying without an informed understanding of all the trade-offs at play in their asset allocation.
All retirement strategies require the investor to assume certain risks in exchange for potential returns. But with careful planning and taking full advantage of various retirement accounts, you can mitigate many of these risks and help your retirement fund grow.
Fisher Investments wants to help our clients reach their retirement goals. To this end, we provide the expert research, careful analysis and clear communication you need to have confidence when investing for retirement. Contact us today to schedule an appointment to learn about our personalized money-management solutions. In the meantime, we encourage you to download our informative guides to assist you in your approach to retirement planning.
If you have a $500,000 portfolio, download our retirement guide called "The 15-Minute Retirement Plan." Even if you have something else in place, this must-read guide includes research and analysis you can use right now.
To develop a suitable plan for your retirement investments, we first get to know you—calculating your net worth, identifying your financial objectives, cash flow needs, investment experiences, financial circumstances, and current investments (stocks, bonds, mutual funds, real estate, etc.), among other factors. Then, based on that information, we develop a portfolio strategy with appropriate asset allocation for the long-term management of your retirement investments.
But our involvement in helping you manage your retirement assets doesn’t stop there. As your situation and goals change over time, we revisit your investment strategy and make adjustments to help ensure you meet your goals. Your portfolio should adapt as your needs change. We also consider changing market conditions and may make adjustments to the portfolio if we forecast a bear market, for example. Furthermore, as part of our high-touch service model, we provide ongoing education to keep you apprised of our thinking around current events and day-to-day market volatility.
Contact Fisher Investments to learn more.
1 As of June, 30 2017
2 Based on FactSet Global Financial data comparing S&P 500 index returns to US Treasurys index returns from 1926-2016.
4 Centers for Disease Control and Prevention, US Life Tables (2009), Vol. 62, No. 7, 1/6/2014
5 Social Security Administration, Calculators: Life Expectancy