How To Invest Retirement Money

It can be difficult to understand how to invest retirement money. Everyone knows they need to set aside money for their retirement, but with a volatile stock market and confusing tax laws it is hard to determine the best path for investment. There is no single answer because everyone is in a different financial situation and has a different risk tolerance for investing.

1. Dollar cost average your investments. Dollar cost averaging is investing a set amount of money each month. This allows you to purchase more units of stock or mutual funds when values are low and less when values are high.

2. Determine your risk tolerance. Risk tolerance is your willingness to see a potential loss in your investments with the hope of higher returns. Everyone thinks they have a high risk tolerance when the market is in good shape, but during times of high volatility investors learn their true risk tolerance. It is important to gauge your risk tolerance early so you do not make the mistake or buying investments at a high value and selling them off as soon as the value drops. You can find risk tolerance tools online or speak with an investment advisor. The key is to be honest with yourself and your advisor so you do not regret your retirement decisions in the future.

3. Invest in 401Ks. 401Ks are a great place to start with your retirement savings. 401Ks are generally employer sponsored retirement plans, and can have an employer matching program. If your employer matches a percentage of your investment in a 401K then this is the best place to start because it gives you immediate return on investment. Also, investment in 401Ks are generally pre-tax dollars, and lower your overall taxable income. A great place to start with retirement investment is to max out your employer match in a 401K. 

4. Invest in Individual Retirement Accounts (IRAs) .   There are Traditional IRAs and a Roth IRAs. Traditional IRAs are pre-tax dollars, or tax-deductible contributions, but you pay taxes when you take out the money for retirement. Roth IRAs are taxed before you invest, but they grow tax deferred and are withdrawn tax free during retirement. There are limits to how much can be contributed to IRAs and 401Ks. In both 401Ks and IRAs you chose what to invest in, including stocks, mutual funds, money market accounts and bonds.

5. Invest retirement money in mutual funds. Mutual funds are a good way to diversify your investments. You purchase into a fund that has established goals like growth, income and balanced accounts. These funds purchase stock of companies that match their investment goals. Because you are buying into a fund that is purchasing many stocks you have immediate diversity. Mutual funds typically have higher fees and charges because of the management on the accounts.

6. Purchase stocks. By purchasing stocks you are buying a small percentage of a business. This is a higher risk investment and requires more research and attention. Typically investors who are active in the stock market have higher risk tolerance and have researched the stocks they are purchasing. You can purchase stocks of large, established businesses with lower risk and return, medium sized businesses, or small and start-up businesses with higher risk and potential return.

7. Invest retirement money in savings accounts, bonds, money market accounts and certificates of deposit. These are the safest routs of investment but see the lowest returns. The main risk with these investment options is the potential that inflation might outpace the interest earned on the accounts. If that is the case, then the accounts are actually losing worth, even though they might be earning a small interest rate.

8. Purchase annuities. Annuities are invested with post tax dollars, grow tax deferred, and you only pay taxes on the gains when receiving benefits. They have additional benefits like survivor benefits, life insurance benefits and the ability to not outlive your payments which is the overall goal of annuities. There are fixed annuities, with a set interest rate from the insurance company, and variable annuities, which invest in mutual funds that you chose. Annuities can be good options when you have maximized your benefits from 401Ks and IRAs