Planning for retirement can be a difficult and complicated journey. Understanding the nature and value of retirement investments you will make along the way is just one daunting aspect of your long-term financial well-being.
Now, we live in an environment in which people are retiring later and more money is required for healthy savings. Understanding the complexities of your retirement situation can ensure that you will be well supported when you do decide to leave your day job.
Fortunately, your investment decisions can be helped with a sufficient understanding of retirement investment types and how to gauge your own needs. Here, we’ll explore how you can understand these values and where your investment efforts will do the most good.
Table of Contents
Key Points
- Planning for retirement involves diversifying assets and gauging the value of various investment types like 401(k)s, which come with annual contribution limits but can be bolstered by employer matches.
- Owning property can offer liquidity and tax benefits in retirement, with options like reverse mortgages available for those over 62 to tap into home equity without selling.
- Besides traditional 401(k)s, consider Roth IRAs and other investment vehicles like real estate investment trusts and mutual funds, especially if you’re self-employed or your employer doesn’t match 401(k) contributions.
- Eradicating debt and planning for unexpected medical costs are crucial steps to ensure you’re financially stable by the time you reach 65.
- Utilising a living trust can safeguard retirement investments by avoiding probate and enabling seamless management in cases of incapacity.
Investment Types and Values
Investing and saving is much more complicated than many of us would like. It involves diversifying your assets across different investment types while calculating future needs and current financial obligations. Amidst all of the considerations you need to make when planning for retirement, fully understanding just how you should value your investment types can be easy to neglect.
However, the way you divide and gauge the value of your investment doesn’t have to be difficult. Here are some of the most common retirement investment funds and how you can estimate what their value will mean for you.
401(k)
The 401(k) is the primary method of saving for retirement utilized by Americans today. This is because 401(k)s are funds that go untaxed and can be matched with employer contributions to secure the maximum value of your invested dollars. However, there is a catch. 401(k)s include contribution limits.
In 2021, the most that anyone under 50 can contribute is $19,500 over the course of the year. For those over 50, you can save up to $26,000, if you have catch-up contributions to make.
The good news is employer contributions are not included in these limits, meaning that if you have an employer that matches your investments you can quickly drive up the value of your 401(k) account. But how much should you be contributing?
Understanding the value of your 401(k) as it applies to your retirement account comes down to your income and your monthly budgeting needs — alongside whether or not your employer matches investments.
A good rule of thumb is to invest 10% of your income in your 401(k), but most people only contribute around 7%. To understand what’s best for you, first calculate a retirement budget. Then, you can gauge yearly contribution rates alongside employer contributions. Your 401(k) should give you a nest egg valuable enough to secure at least your monthly expenses throughout your retirement and more or less keep your growth on auto-pilot.
Assets and Property
Next, you need to examine the value of your home as well as its liquidity potential and associated expenses. Your property can be an important asset as part of your retirement investments, but it can also increase the amount you need to have saved up.
Houses are also great in terms of tax benefits and capital gains. If you’re married, you can exclude up to $500,000 in gains on the sale of a home in your tax obligations. If you’re single, that amount is halved. Boost your appraisal value before you sell with improvements and renovations to make the most of these tax benefits. This is money you can then use to support your retirement account after downsizing or relocating to a less-expensive area.
Alternatively, a reverse mortgage can allow you to tap into the equity of your home throughout your retirement. If you’re over 62, you can qualify for a Home Equity Conversion Mortgage and use your equity to supplement your retirement income. This can be a great way to manage your property investment if you don’t intend to move or sell anytime soon, as closing costs can cut into your ability to repay the loan.
Even if your property values outweigh the value of your loan, your heirs won’t need to make up the difference because a conversion mortgage is a federally backed, non-recourse loan.
Your property and assets can be great retirement investments which could be liquidated during your retirement to raise capital. Whether you intend to downsize or keep living in your home, these options can support any income discrepancies you might find in your other retirement savings accounts.
Gauging your equity and asset worth for retirement needs should start with goals for your property. Work your retirement plan around how you want to live, then plan to subsidize your savings with equity as needed.
Where to Start your Investment Journey
The various investment types that will support your retirement go far beyond just a 401(k) and any properties you might own. However, determining the value of your overall retirement assets has to start somewhere, and early. These are some of the best places you can direct your savings for asset growth.
Additionally, you can direct your funds into accounts like Roth IRAs, where your gains won’t be taxed. This can support your savings strategy if you are self-employed or your employer doesn’t match your 401(k) contributions.
Then, there’s always supporting your portfolio with rental properties, real estate investment trusts, mutual funds, and more. Start by speaking with a professional financial advisor to explore all your options. It’s never too late to start.
In the meantime, make the most of your retirement savings by eradicating your debt. Ideally, you should be debt-free by the time you’re 65, with ample savings for medical and financial costs. Unfortunately, however, medical costs can sneak up on anyone. Explore avenues for medical bill forgiveness and keep these strategies in mind as part of your retirement investment toolkit.
Retirement and the associated costs can be hazardous to your health, but with the right investment approach and understanding, you can secure financial comfort in your old age. Consider how your 401(k) and property assets affect the value of your retirement nest egg, then plan for financial success.
Protecting Retirement Investments With a Living Trust
Living trusts offer a secure way to protect retirement investments and assets, ensuring they are managed according to your specific wishes both during your lifetime and after.
By placing these assets into a living trust, you gain the advantage of avoiding the often lengthy and public probate process, thus facilitating a quicker and more private transfer to beneficiaries. A living trust also allows for the seamless management in cases of incapacity, enabling a pre-appointed trustee to handle your financial matters without court intervention.
This structure not only safeguards your retirement nest egg but also provides a strategic layer of control and continuity over your investments.
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.