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10 Of The Best Retirement Investments

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Like most people, I am saving in a number of ways toward retirement, with one eye on what might be the best investments for retirement, when I get there. On the way, of course, there are 401 (k)’s, Roths, and various non-traditional routes available to most of us.

For example, target date mutual funds take the stress out of cutting risk toward retirement by naturally moving out of stocks the closer the investment gets to a set retirement target date: perhaps among the best investments now for the passive investor.

With treasury yields well below 2%, the stock market exhibiting renewed volatility, and returns on cash non-existent, investors are also turning to alternatives such as real estate, exchange traded funds, and energy commodities. And on the list of possible investments are also high yield corporate bonds and, perhaps, some emerging market sovereign bonds.

But, what about when you come to retirement itself – what options are there to produce the income needed throughout a, hopefully, long and healthy retirement?

What is the best investment for retirement for you will depend upon your individual situation, of course, but as income producing options any of the following ten could be used as stand-alone solutions or in combination. The point is there really is a wide range of choice when it comes to the best retirement investment to suit income need and attitude to risk.

These 10 best retirement investments are listed in no particular order.

Single Premium Immediate Annuity (SPIA)

This will provide you a guaranteed income, and can be structured so that the level of income grows with inflation or at a pre-set rate. Annuities give you certainty of income for the remainder of your life though once you’ve paid your money in you can’t withdraw any of that capital: it’s now the property of the life company that has issued the annuity. This means that there won’t be any money from the annuity for your loved ones when you die, and that can be a disadvantage too far for many.

Variable Annuity

When you buy a variable annuity, you are buying a portfolio of investments. You choose these, of course, but it does mean that the return achieved, and therefore any income, is dependent upon the performance of the portfolio. This is different to an SPIA where the income you receive is guaranteed by the insurance company.

Bonds

Government or corporate debt instruments (bonds) will pay you interest on the amount you lend for the lifetime of the bond. When the maturity date is reached, your capital is returned to you. Though such bonds are often marketed as having your capital guaranteed, the guarantee is only as good as the financial condition of the underlying company or government.

Property

The attraction of property is that it will give you a rental income – whether residential or commercial – and may increase in value. This last point, of course, used to be taken as a guarantee: the property market crash of 2006 – 8 dissolved this misconception. But being a landlord has drawbacks: there will be maintenance costs, for example, and it’s not unknown for tenants to mysteriously disappear.

Cash and cash lookalikes

This covers bank savings accounts, certificates of deposit, treasuries (bonds issued by the U.S. government), and money market accounts. Such investments are among the safest available, but consequently offer among the lowest returns. Your income might not keep pace with inflation, but your capital should be safe.

Retirement Income Funds

This type of fund allocates your cash across a range of stocks and bonds, and pays you a monthly income. One of the major attractions of this as a retirement income producer is that you can still access your principal – unlike an annuity. But it has to be remembered that any withdrawal will harm the income you get.

Closed End Funds

Producing income monthly, quarterly, or annually, these funds can cater for different investment objectives and risk profiles. They are run by professional managers who will seek to invest in instruments that pay dividends or interest, as well as utilizing covered call options and warrants. There are plenty of positives with these funds, though it has to be remembered that, however it’s packaged, risk is still risk.

Dividend Income Funds

A managed fund that aims to pay an income from the dividends it receives from a portfolio of dividend stocks. Though diversified across a number of stocks the diversification stops there. Investing solely in such a fund will give exposure only to the one asset class, and thus the risk profile could be pretty high.

Real Estate Investment Trusts (REITs)

REITs are funds that own real estate. They do everything you would do were you to own the property direct, and then pay income to you, the investor. There are rules stating how much of their profit they have to distribute to shareholders (90%), but, like dividend income funds, used without other investments they might be considered to overexpose to a single asset class.

Your Own Portfolio

Creating your own portfolio, or having a financial advisor do it for you, will give you the greatest flexibility of investment. It is possible to invest in a diversified portfolio of stocks and bonds, designed to give a good long term return. A disciplined strategy should allow you to benefit from set withdrawal rates allowing you to take between 4% and 7% each year.

Conclusion

There are now more options for an investor to create income in retirement than ever before. This offers you greater flexibility and choice of funds, style of investment, and asset. However, it has to be remembered that relying on a single source for your income may not be the best investment for retirement.

You should also remember that investment markets are a fluid and ever changing beast. What might be among the best investments now may prove to be among the worst performers in twenty or thirty years’ time.

How Much Money Do I Need to Retire?

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Retirment cashThis is a question that I hear regularly from the baby boomer generation now they are edging toward retirement. Of course, what we all actually mean when we ask the question is ‘how much do I need so that I can live the rest of my life in comfort?’

It is, in reality, an almost unanswerable question. There are so many unknowns that need to come into the equation that the best we can do is look behind us in order to peer into the future.

What we all wish we knew

According to the US Labor Department, inflation cost 39% of purchasing power in the twenty years between 1991 and 2011. In other words, $100 in your pocket in 1991 would only be worth $61 now. Put another way, to buy the same amount of goods today as you could with $100 in 1991 you would need $163. Just imagine having retired in 1991 on a fixed income, and trying to survive now on the same number of dollars in your pocket as you did back then.

Many retirees purchase annuities to provide income in retirement. These pay income on a regular basis, and can be structured so that the income increases in line with inflation.

However, the rate of return depends upon interest rates – as well as a number of other factors – at the time the annuity is purchased: when interest rates are low, so too is the return on an annuity. Unfortunately, we don’t know what returns will be when we retire. If a return of 5% is paid on an annuity and you require $50,000 per year to live on, then you’ll need a pot of $ 1 million to purchase that income producing annuity.

Others rely on the return on investments that can be achieved from a portfolio of stocks and bonds. Prevailing rates of return are the key here. Stock dividends of around 2% have hardly been enough to produce great returns over the last 10 years or so while major stock market indices have stagnated. Meanwhile, yields on corporate and treasury bonds are at historic lows.

If you assume that inflation averages around 3% over the next 20 years and your portfolio returns 5% per annum, according to BTN Research you’ll need a lump sum of $196,000 for every $1,000 of monthly income you need. If you expect to live 30 years in retirement, this number goes up to $269,000. So if you want $10,000 per month through 30 years of retirement, you’ll need $2.69 million when you retire.

So, there are many variables that we need to take into account when we are planning for retirement, almost all of which we can only guess at until retirement is upon us.

Other things to consider

How long do you plan to live in retirement? This may sound like another unanswerable question, but you have to have a basis on which to invest for your retirement and this is the first call you need to make. The longer you expect to live, the more money you’ll need to produce the income you need – planning for a lifespan after retirement of 10 years, and then surviving 20 will be catastrophic to your later life finances.

Social security payments are wide ranging at the moment. But that doesn’t mean they will still be available in 10, 20, or 30 years’ time. Social security is an unfunded program, paying benefits out of taxes collected from workers. In the future there is likely to be fewer workers supporting greater numbers of an aging population.

At present day demographics, there are around 7 workers supporting each retiree. It’s estimated that by 2050 this ratio will be down to 2:1. With numbers like these, it really is best to discount any potential social security benefits available in retirement, because they probably won’t be.

If you have a lump sum at retirement and invest in the investment markets, your return will be based upon the price of the market when you invest. What this means is that if you invest when the markets are low, your investment returns will be higher than were you to invest when the markets are high. Timing of investment is crucial when it comes to retirement.

So, how much do I need to retire?

It would seem that the answer to this question is a constantly moving target. There are so many variables and so much uncertainty, and none of us have a crystal ball. But all is not lost, because there is one way to accurately answer the question how much do you need to retire:

You need enough to be able to live.

Consider this. If you spend $570 per week, or approximately $2500 per month, you’ll need about 25 times this amount to generate the income you need through your retirement. This is based upon the rule of 25, which says a realistic long term return of 4% on investment can be achieved (after inflation of 3%).

So, if you spend $30,000 per annum ($2500 each month) you’ll need a pot of $750,000 to satisfy this requirement. But, if you can reduce spending by $1,000 per month then you’ll need $300,000 less. Reducing expenditure has a massive payback.

Or you could use the 4% rule

The 4% rule says that you should withdraw 4% of your retirement fund in year 1, and then follow that by increasing for inflation every year thereafter. This rule also assumes a 4% real return, just like the rule of 25, but gives an increasing amount of income.

You only have to calculate the 4% in the first year, and then each year you adjust the amount withdrawn for inflation. Assuming you have $750,000 in your retirement pot when you retire, your first withdrawal would be $30,000. The following year, if inflation is running at 3%, you would withdraw $30,900 irrespective of investment performance.

Of course, this might be more than 4% of your portfolio should your investment perform poorly: but sticking to 4% rule means you don’t need to worry about this. Or, at least, that’s the theory.

In summary

The real answer to how much money to retire is needed is, in truth, as much as possible. For those of us that fall short of this ideal, then a certain degree of budgeting will be necessary.

But perhaps the secret is to begin planning as early as possible toward happy years in older age, making the most of pension investment opportunities and tax breaks as we work, and save, toward a long, healthy, and wealthy retirement.

Do You Know How to Read Stocks?

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It’s hard to be a success at the stock market and not know how to read stocks. It doesn’t matter if you are a fundamental investor or a technical investor; if you have anything to do with stocks, it is highly recommended that you learn how to take in various forms of data and intelligence about stocks and interpret what they mean for you and your portfolio.

Reading stocks doesn’t have to be complicated, either. Contrary to popular belief, you do not have to be an expert with indicators like Bollinger bands, MACD, or any other advanced metric. You simply have to know how to make sense of the information that is given to you and know what it means.

Here, I’ll give you an overview of how you can read stocks – especially how to make sense of the standard info you receive from a stock quote throughout the day.

The Anatomy of a Basic Stock Quote

If you turn on CNBC, or go to Google Finance, or use your trading platform, you’ll see a ticker scrolling by with the abbreviations of companies and numbers in various colors. These are abbreviated statements of the stock’s current price, and give you the first clue as to what the stock is doing in the market at that moment.

Let’s take a closer look at a quote.

apple chart

The above quote is for Apple (AAPL), taken from Google Finance. Your screen will look different if you use something other than Google Finance, but all the basic information is the same.

The first thing to know is the spot price, which in this picture is 604.30. This is the value of the stock at this moment in time. It is expressed in “points”, so it would be 604 points, instead of 604 dollars. Below that is how many points the stock has risen or fallen. The number in parentheses is the percentage of the overall value that the stock has risen or fallen. When seeing how much the stock has risen or fallen, ignore the points number and look at the percentage; it provides you with a better perspective.

The range is the price range over the current trading day. Below it is the range over the last 52 weeks. Below that number, you see something called the open. This number goes with a group of other numbers called the OHLC – open, high, low, and close:

  • Open: The price at the beginning of the trading day
  • High: The highest price the stock reached during the day
  • Low: The lowest price reached during the day
  • Close: The final price

Note that the close for one day and open for another day are not necessarily the same. Stocks can be traded after hours.

Volume

We’ll stop here and address a crucial element of any quote: volume. Volume is the number of shares that have been traded – bought or sold – throughout the day. You can glean a lot of useful information from analyzing volume.

For starters, a stock with low volume is thinly traded, which means it lacks liquidity. That means it can be hard to buy or sell. Likewise, a stock with higher-than-average trading means that the stock is very liquid, but can also be very volatile (meaning the price goes up or down relatively quickly and dramatically).

On its own, volume isn’t terribly useful. When coupled with price on a chart, though, it can be more useful. For example, churning is when higher-than-average volume is accompanied by a stock trading in a narrow price range. This means a lot of shares are changing hands, but the price isn’t corresponding appropriately.

Usually, this is the inverse of what typically happens, which is this saying: “Volume precedes price”. Spikes in volume represent higher interest in a stock, which usually precedes some change in price.

Price Metrics

The other data on the chart reveal very important metrics that are connected to the stock’s price.

The first is market capitalization. All you need to know about this is that the market cap represents the number of outstanding shares multiplied by the stock’s price. This gives you an indication of the rough “size” of a company.

The next one is a big one – the price-to-earnings (P/E) ratio. A P/E ratio is the stock’s price per share divided by the stock’s annual earnings per share (EPS).

A P/E ratio gives you some idea of how the market values a company’s stock. All other things considered equal, a stock with a higher P/E ratio than another, almost-identical stock with a lower P/E ratio will be considered a better investment. It’s important to compare a stock’s P/E ratio with the average P/E ratio for the industry in which it is in. If a stock’s P/E ratio is higher, it could be a growth stock – but if it is too high, it is very possible that the stock could be overvalued.

Similarly, a low P/E ratio is one indicator of a value stock, a sign that the company could be undervalued (when used with other indicators).

The next number is the dividend/yield. The dividend is the dollar amount per share that is distributed to stockholders on a quarterly to annual basis. The yield is the percentage of the entire annual dividend divided by the current share price. If the company delivered a total of $1 per share in dividends last year, and the stock’s current price is 10, then the yield will be 10%. (Most yields are much lower.) Most investors who aren’t interested in dividends or income stocks largely ignore this number.

The next number – EPS (earnings per share) – is a big one. This is calculated by taking the company’s net income for a quarter, subtracting any dividends paid on preferred stock, and dividing this number by the number of average outstanding shares over that period. For example, if the company brought in $30 million in income, paid out $5 million in preferred dividends, and had an average of 5 million shares outstanding, the EPS would be 5.

All other things being equal, a higher EPS is preferable to a lower one. This means that each share of stock is more productive in producing profit for the company.

EPS can be easily manipulated. But, it also is a driving force behind the market’s perspective of a stock. If a company routinely misses EPS estimates, its stock will suffer. If it hits or beats EPS estimates, the stock’s value will probably rise.

Beta and Institutional Ownership

The last two figures on the chart are ignored by some investors, but are taken into consideration by virtually every strong investor in the market.

Beta is a statistical value that indicates how volatile a stock is in relation to the market. The market has a beta of 1.0. If a stock’s beta is higher, then its price varies more than the market’s return. If a stock’s beta is lower, it varies less. In other words, AAPL’s beta is 1.21, which means its price will be 1.21 times more volatile than the market, on average. (If the market goes up by 1%, AAPL will go up by 1.21%).

If beta is negative, there is an inverse relationship. If the beta is -1.21, then AAPL will decrease by 1.21% for every 1% gain in the market.

The last figure is institutional ownership. This is the percentage of shares that are owned by institutions, which include financial organizations (like investment banks), endowments, pension funds, insurance companies, mutual funds, hedge funds, and other large, well-funded entities. There are two schools of thought about this. The first says that higher percentages of institutional ownership indicate “approval” of the stock from the market.

The second suggests that high percentages of institutional ownership leaves little room for individual investors to realize big gains, since, presumably, all the “big gains” would have already been earned.

By looking at all of these figures, you can become more adept at analyzing a stock and grasping the crucial bits of data and information about a stock so you can make a more informed choice. Good luck!

How To Get Rich With The Stock Market Over Time

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Savers who place money on deposit in a savings account will do well, over the long term, to merely keep pace with inflation. Investing in government bonds is hardly likely to make a fortune: governments may not be very adept at controlling spending, but they can’t be seen to give money away, either. Investing in precious metals can give great returns, but there is no income to be earned and price volatility is a problem too often ignored.

That leaves the stock market as the only viable alternative to financial freedom and long term wealth. Many investors shy away from the stock market, viewing it as no more than a rich man’s casino. But it doesn’t have to be that way. Taking a disciplined approach to stock market investing can produce returns unachievable elsewhere.

Here are ten steps to follow if you want to get rich by investing in the stock market.

Learn to select stocks to invest in

There are many different ways to pick stocks, ranging from fundamental analysis – examining a company’s balance sheet, earnings potential, and prospects for the future – to the technical analysis of share price patterns. You don’t need to be a mathematical genius to do either proficiently, but you do need to learn the craft and be consistent in approach.

Have an investment strategy

Selecting the stocks to buy is only a part of the equation of successful investing. The success of an investment portfolio will rest on the strategy employed by the investor. Risk needs to be managed, entry and exit points adopted, and costs of dealing borne in mind. Some investors select stocks, buy them and then hold for the long term. Others have a more active outlook, willing to buy and sell shares regularly as loss limits are reached or price targets hit. Set an investment strategy, but be flexible to adapt to the needs of the time.

Use dollar cost averaging

It is tempting to invest a lump sum in one trade, at a single moment. Certainly, if the trade proves correct then such an investment style can make healthy profits very quickly. But stock prices fluctuate on a daily basis, and this means they fall as well as rise. By investing over a period of time – drip feeding investment cash into the market – an investor takes advantage of the times when stock prices are down as well as up.

This process is known as dollar cost averaging, and is a recognized way to smooth entry levels and price volatility of an investment portfolio. By investing regularly, perhaps monthly, a trading discipline is achieved and a more active approach to portfolio management naturally taken.

Diversify your portfolio

Though it may be difficult, and costly, to spread investments across a number of stocks or business sectors when you first start investing in the stock market, doing so when it is financially viable to will help the longer term performance of your portfolio. You should consider holding shares in more than one company and more than one business sector. This helps the winners outperform the losers, and takes advantage of the changing economy and its effect on business.

Keep abreast of news

Information is power. By following the news particular to the companies in which you have invested you will better understand your investments and make more considered buying and selling judgements  This also stands true for the industries in which you are invested, and general economic situation.

Regularly monitor your portfolio

As well as keeping up-to-date with current news that affects your stocks, also ensure that you know how your portfolio is performing. Measure against a benchmark, for example the S&P 500 index, and take remedial action if necessary. Monitoring your portfolio should go hand-in-hand with your investment strategy, and will form part of your investment discipline.

Conduct an annual investment review

Once a year, you should undertake an in-depth review of your portfolio. Consider how your stocks have performed, against their peer group and the wider market, and also review expectations for the economy and business sectors moving forward. For example, if a weakening economy is forecast, then perhaps a rebalance of holdings toward a more defensive mix will be required.

Reinvest dividends

Reinvestment of dividends can be an expensive process, particularly when an investment portfolio is smaller and absolute dividends low. However, if these dividends are saved in a separate interest bearing account, then as part of your annual review they can be reinvested. This will buy more shares on which further dividends will be earned. Using a dividend reinvestment strategy compounds growth over the longer term, and is a key to portfolio performance.

Don’t feel you have to follow the crowd

There is safety in numbers, but following the crowd will not help you outperform it. Indeed, the likelihood is that you will buy after the optimum time to buy, and sell when many others already have. By conducting your own research and selecting your own stocks to buy and sell, your portfolio will be unique to your individual needs and requirements. Just because everyone around you thinks ABC is a good investment, doesn’t mean it is.

Invest tax efficiently

Wherever possible, look to hold your investments in tax efficient accounts, such as IRAs, Roth IRAs, or a 401(k). Understand how tax is levied on capital gains and on dividends, and if necessary employ the services of an accountant to help with tax planning.

In Conclusion

Investing in the stock market isn’t risk free. Stock prices move up and down and are affected by changing economic and investment conditions out of the control of company management and the individual investor. But over a long investment time frame and with a well-considered investment strategy that includes risk management, a stock market portfolio can prove not only profitable but an enjoyable way to manage your future wealth.

By following the ten steps above, there is no reason why you should not get rich by investing in the stock market.

Invest In Stocks And Bonds With Safe Mutual Funds

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When it comes to the market, there is one cold, stark reality: any investment is a risky one. Granted, you could choose to invest solely in U.S. Treasurys, which are the world’s safest investment, but that certainly won’t make you rich or provide fully for your retirement.

The truth is, if you want a decent return, you will have to deal with a bit of risk. There is a spectrum of risk and return for various assets in the market. On one end, you have stocks, options, and futures, which offer the highest returns (typically) with some of the highest risk. On the other end, you have U.S. Treasurys and other government bonds, which are backed by the full faith and credit of the United States of America but offer small returns.

Mutual funds can be placed at virtually any place along the spectrum, all based on the riskiness of the underlying asset that the fund represents. Stock mutual funds are riskier than bond mutual funds, for example. To say that a mutual fund is ’safe’, then, is not necessarily true. When compared to just buying individual stocks, though, most mutual funds do not carry as much risk.

To find the best mutual fund investments for safety, then, you have to know a bit about the underlying assets that funds represent, what risk and return they carry, and how you can find these mutual funds and make use of the min your portfolio.

Assessing Mutual Fund Types

Stock Mutual Funds

The most popular type of mutual fund is a stock mutual fund or equity mutual fund. These funds contain shares of many different stocks. Even within this category, there is a spectrum. A stock fund that invests in just one sector carries more risk than a fund that invests in, say, five different sectors (because the risk is spread out). A stock fund that invests in solid, large-cap, blue-chip companies carries less risk than a fund that invests in smaller, less well-known, and less stable companies.

One way to find safer stock funds is to find funds that invest in stocks with low beta. Beta, or the beta coefficient, is a number that determines how volatile the stock is compared to the rest of the market. A stock with a beta of 1.0 is in equilibrium with the market; it fluctuates in price roughly the same as the market does. A stock with a low beta, then, is considered less risky because it is less volatile. Its price does not rise – or fall – nearly as much as other stocks. Also, if the stock’s beta is positive, it appreciates when the market does; if it is negative, its performance is opposite that of the market.

Bond Mutual Funds

Another type is a bond mutual fund. This type invests in bonds, which are basically IOUs from corporations and governments that come with a given interest rate and a price due to the holder of the bond when the bond matures. Bonds are typically negatively correlated with stocks. In other words, when stocks are performing well, bonds usually aren’t; when bonds are strong, stocks are weak.

A bond mutual fund contains several different bonds. The Oppenheimer Champion Income Fund A (OPCHX) is an example of a bond mutual fund. This particular fund holds corporate bonds and foreign bonds in addition to a small amount of stocks, cash, and other assets.

You can use some of the same measures to determine the risk of a bond mutual fund. For example, the beta of OPCHX is -0.42. This means that the bond generally performs opposite of the market’s performance, and does not fluctuate as much as the market does.

You can also use something called a fixed-income style box. This is a chart created by Morningstar that gives you an at-a-glance idea of a bond’s risk and return. The style chart for OPCHX is here; it is the black-and-white, nine-square box in the middle of the page. You can see that the sensitivity of the bond to interest rates is moderate (bonds are sensitive to interest rates, which is a key risk), and that the quality of the bonds held by the fund are low. The lower the quality (as determined by the bond’s rating), the higher the return – and risk.

Money Market Funds

Finally, you can find money market funds, funds that invest in the money markets that contain corporate and government debt securities. These include U.S. Treasurys (Notes, Bills, and Bonds), which are the safest investment assets in the world. As you can imagine, money market funds generally are the safest mutual fund investments you can make, primarily because most government, municipal, and corporate bonds, bills, notes, and other debt obligations are pretty sound.

For example, the Vanguard Prime Money Market Fund (VMMXX) is a money market fund that invests in 471 holdings. Close to 33% of these holdings – or 155 holdings – are U.S. Treasury Bills. Close to 8.5% is invested in corporate paper, which are generally very sound and relatively free from default (usually you see corporate paper from reputable corporations, not unstable ones).

Returns aren’t great; since VMMXX’s inception in 1976, it has returned just 5.75%. It’s 10-year return is 1.91%, which is higher than the average of 1.46%. But, the risk is far lower than other assets, too.

What are the Safest Mutual Funds?

Most in the field will tell you that the safest mutual funds you can find are money market funds, primarily those that invest heavily in U.S. Government debt. No one anticipates that the United States will ever default and go bankrupt, and virtually everyone assumes that American credit will be relatively strong for the foreseeable future. That is why countries continually purchase billions of dollars worth of federal debt; they anticipate a return that is virtually guaranteed.

You can benefit from this by turning to money market funds for a safe, (relatively) risk-free investment.