Best Ways to Invest Your Pension
In the past, retirement planning followed a simple formula, you work, build savings and then you retire. Although the mechanics of retirement have remained the same, today’s retirees are facing increasing challenges as they financially prepare themselves for their golden years.
For starters, life expectancy has increased, making the average retirement period longer. Research shows that babies born after 2007, around 50% of those are expected to live to 104 years in the US.
Coupled with a longer retirement is the soaring cost of living, which in recent months has reached stratospheric levels, as inflation and macroeconomic problems have seen prices climb to their highest in more than four decades.
More and more companies have scrapped the idea of a defined pension benefit as well. The shift in workplace loyalty among newer generations has given soon-to-be retirees and current employees less financial support from employers toward their pensions. Today, the average monthly Social Security benefit for a retired worker is about $1,681, and will potentially rise to $1,827 in 2023.
For the millions of soon-to-be-retired Americans, plumping their savings and boosting their pension with some alternative investment opportunities will be one of the best options they have as they look to navigate the uncertain financial road ahead.
Retirees planning to pay off their mortgage, travel to exotic destinations, migrate to a different state, or even do a cross-country road trip will need a bit of cash to do all these things while still being able to live comfortably.
Here’s a look at some alternatives to invest your pension for a more comfortable retirement.
Dividend income funds
Often individuals will purchase stocks or dividend-yielding stocks that provide them with an alternative income stream. For retirees that are looking to minimise their risk against a volatile market, dividend income funds can provide a steady income over the years, especially if companies decide to raise their dividend payouts.
Dividend income funds often consist of a fund manager that manages the fund and the dividend-paying stocks, which makes it a more suitable choice for any person, even if they have no prior trading or investing experience.
In some instances, companies will allocate dividends that may be taxed at a lower rate compared to that ordinary income or interest. In this case, these dividends are classified as “qualified dividends” and should be held in non-retirement accounts or funds.
Real Estate Investment Trusts
In 2020, around 58.1% of working-age baby boomers, between the ages of 56 and 64 were most likely to own at least one type of retirement account. Often, working individuals who are soon to retire will either have an IRA, Roth IRA, or a standard 401(k).
While these products can produce significant savings for retirees, investing in real estate, or at least in a real estate investment trust allows them more opportunities to grow their wealth and their retirement portfolio.
Like a dividend mutual income fund, a REIT is a mutual fund that either owns or invests in real estate property. These funds are typically managed by a team of fund managers, and in most instances, investors are allocated an income as the fund matures over time.
REITs are a simpler, yet a safer option for retirees, as it allows them a better chance to invest in property and real estate, without directly exposing themselves to market volatility. Think of it as a way to increase your savings and wealth, regardless of whether you’re planning to use those savings to build your dream home or relocate abroad to Canada or somewhere exotic – REITs often provide better security for pensioners.
When planning to invest in annuities, it’s best to consider the two types of annuity products that are available. For starters, fixed annuities are often considered to provide retirees with a guaranteed income for life, which can help them hedge inflation and potentially offer tax-deferred growth.
The second annuity product is fixed index annuities, which have the same benefits related to the before mentioned but have marked-related growth factors. This means that fixed index annuities are considered more of a risk, as they can fluctuate with the market, but depending on the index it may be related to, the reward may often be higher than regular annuities.
There are several benefits to annuities, and retirees should consider each product and their benefits individually before adding it to their retirement portfolio.
Exchange Traded Funds
Often considered a traditional investment option, ETFs are mutual funds that are a mix between stocks and bonds that often track the index benchmark. With ETFs, individuals have the option to buy and sell their mutual fund at any point, as they are priced in real-time, and traded on the stock exchange.
Usually, retirees or early novice investors will opt for ETFs as these are considered safer investment options, and are relatively affordable to buy. Important is the fact that the longer you hold an ETF mutual fund or any related stock pick, the better your chances of increasing its value over time.
This is true for most investments, and when it comes to ETFs, it’s easy to hold onto it well into retirement, only to later sell it off once it has reached a pinnacle. The longer you hold, the more valuable the fund, and the more likely you are to save on fees and additional costs which can be directed towards your retirement fund.
Why is investing important in retirement?
There are several important reasons why one should look at different investment opportunities well before or during retirement. Traditional pension and retirement plans, such as a 401(k) or Keogh Account are no longer enough to financially sustain you during your retirement.
The soaring cost of living, volatile markets, and uncertain labour conditions have made it increasingly hard for many individuals to plan and save for their retirement. Instead of holding onto the idea that life savings or an emergency fund will be enough to keep you going once you hit retirement, it’s best advised to start looking for alternative pension options that can help give you a comfortable retirement.
As many soon-to-be retirees enter their golden years, some have opted to park their pensions in several investment opportunities that can provide them with a sustainable income. Not only are there more options available for retirees in terms of boosting their retirement portfolio and savings, but often these products can provide better financial security as well.
Planning for the future can be hard, as we’re not sure what to expect or what to plan for. Yet, it’s rather better to have a financial safety net in place now so that by the time you retire, you can live comfortably off your earnings.