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How to invest for retirement: Strategies for the long-term

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Building your nest egg and setting yourself up for success in retirement can be exciting. To help accomplish this, many people look to investing. But with so many different options and account types available, it can be difficult to know which are best for your retirement plan.

Here's a look at how to invest for retirement—including investment types, tax-advantaged accounts, and the importance of diversification and assessing your risk tolerance.

Setting a strategy for your retirement investments

Whether you're just getting started with retirement savings, you're already retired or you're somewhere in between, it's critical to know how to approach long-term investments. To build your strategies for retirement or to give your current portfolio a check-up, you can follow the steps financial planners use for long-term investing:

  1. Define your goals and time horizon.
  2. Determine your risk tolerance.
  3. Create a retirement investment plan.
  4. Select the right investment types.
  5. Use tax-advantaged retirement accounts.
  6. Implement your retirement investing plan.
  7. Monitor the plan and make adjustments as necessary.

1. Define your retirement goals and time horizon

The first step to take in financial planning is to identify the goal: In this case, it's funding your retirement. You'll want to build out this goal in detail. One useful way to help define your financial goals is to make them SMART:

  • Specific. Think about what you want your retirement to look like. Where will you live? Will you travel? How do your values, community and family factor in?
  • Measurable. Once you have a picture of your retirement life, you can calculate how much money you'll need to support it. This will direct how much you need to save, the rate of return you'll seek for your investment portfolio and the amount of time you'll need to reach your goals.
  • Achievable. Assess your expectations and gut-check how reasonable they are. Do you have enough time to reach your goal? Do you have sufficient disposable income to reach your target savings rate? You may need to make adjustments.
  • Realistic. Building on the achievable aspect, be critical about what's possible versus what's probable. For example, it's not realistic to anticipate an average return of 15% on your investments when the historic average for the stock market is about 10%.
  • Time-bound. Based on the other SMART criteria, when can you expect to achieve your goal? For retirement, you'll also want to consider factors like how many post-retirement years you'll need your savings to last.

That last item leads to a key component you'll need to know: your time horizon, or the minimum length of time you intend to keep your money invested. Knowing this will help you select your long-term investments based on how conservative or aggressive time will allow you to be. For example, if your time horizon is 20 years, you can afford to take on more risk and invest more aggressively (knowing you have time to recover if need be) than a person who has just 5 years to invest and should do so more conservatively to help protect against loss.

2. Determine your risk tolerance

With your goals outlined and your time horizon identified, you'll next need to know your risk tolerance before choosing your investments. It's a gauge of how comfortable you are with your money going up and down in value based on the nature of the investment. The main risk to consider is market risk, which is the chance that your investments could lose value due to market volatility. Your time horizon is one aspect, but the factors that determine your risk tolerance are mostly tied to your personal characteristics:

  • Your age. When it comes to investing for retirement, your age generally aligns with how long you have until retirement. Younger people may be able to take on more risk compared with older people since there's more time to recover from any market volatility.
  • Your investment knowledge and experience. Depending on your track record with investing, you may be more or less willing to take on risk. Investors who have experienced market volatility often have a greater comfort level with taking on more risk for the potential of earning higher returns.
  • Your financial psychology. Money can be an emotional topic, and life experiences can shape your feelings about investing. For example, people who grew up on tight budgets may be more cautious with their money than those who grew up comfortably affluent.
  • Your goals. With retirement, you generally have a long time frame to invest, and this will affect the degree of risk you can take with your investments. If you're closer to reaching your goal, or you're already retired, your goals may be more aligned with income and preservation than growth.
  • Your financial position. Your income, your current net worth and the amount you already have invested are all important factors when defining your risk tolerance. People who have more disposable income or a higher net worth often can withstand taking more risks, though that certainly doesn't mean that people with lower incomes are limited to low-return investments.

One factor that should not guide your risk tolerance is your opinion of market conditions. It happens, but it is not recommended that you let the market's current trends influence your decision to be more aggressive or conservative with your money. Rather than letting emotions guide your investment approach, try to assess the facts and stick to your investment plan.

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3. Create a retirement investment plan

Guided by an investor's goals, time horizon and risk tolerance, an investment plan is the foundation for building and managing your portfolio. A good retirement investment plan may provide an outline or overall philosophy used to select, monitor and replace investments within your portfolio.

Choosing your investment strategies for retirement involves weighing considerations like these:

  • Investment objectives. Investment strategies are driven by a clear objective, such as growth, income, preservation or some combination of those. Younger people who have decades to invest before retirement may focus on an aggressive growth strategy, which might involve equity-based investments like stocks. However, an investor who's already retired may prefer to focus on income-oriented investments like bonds and dividend-paying stocks.
  • Asset allocation. Measured by percentages, your asset allocation is the mix of investment asset types—stocks, bonds and cash—that's appropriate for your risk tolerance and time horizon. An investor with a medium risk tolerance and more than 10 years to go before making withdrawals may, for example, choose an asset allocation of 60%–70% stocks and 30%–40% bonds.
  • Active versus passive investing. Active investing involves buying and selling investments with the goal of earning above-average returns. A passive strategy takes more of a buy-and-hold approach. Passive investing often involves automated retirement contributions and selecting investment types like index funds that aim to match market returns.

4. Select the right investment types

Within each asset class, you'll choose specific investment types that suit your retirement planning goals. When making these selections, it's wise to incorporate diversification, the practice of reducing market risk by spreading your assets among numerous investments.

  • Stocks. Also called equities, stocks represent ownership in a company. Stocks can be a great way to build long-term wealth, but they can be volatile and subject to market fluctuations, which makes them appropriate for long-term investors with more risk tolerance.
  • Bonds. When you buy a bond, you're lending money to a government or corporation. In exchange, they agree to pay you interest over a period of time. Bonds often are considered stable investments, can provide diversification and are usually a good fit for conservative investors. However, bonds are not guaranteed and can lose value, especially when interest rates are rising.
  • Mutual funds. Since mutual funds consist of pooled money from many different investors and spread your money across a variety of investments in one basket, these versatile securities can provide diversification and flexibility to suit your risk tolerance.
  • Exchange-traded funds (ETFs). Like mutual funds, ETFs enable investors to purchase an interest in a diversified portfolio of securities. These might include stocks, bonds or other assets. Unlike mutual funds, ETFs trade like stocks on an exchange, which means they can be bought and sold throughout the day. ETFs typically track the performance of an index like the S&P 500 and have lower fees than mutual funds.
  • Real estate. Investing in real estate can take many forms, from converting your own home into a rental property to investing in a real estate investment trust. One of the biggest advantages of real estate investing is that it is a physical asset that not only appreciates in value over time but also can be a valuable source of income in retirement.

5. Use tax-advantaged retirement accounts

Some retirement accounts such as individual retirement accounts (IRAs) and 401(k) plans offer tax advantages to help your money grow faster. When you can grow your money tax-deferred, you take full advantage of compound interest, which is the effect of earning interest on top of interest. When interest and dividends from investments are not taxed, you keep more money to compound.

The main types of tax-advantaged retirement accounts are:

  • Traditional IRA. Contributions are pretax, which means they reduce your taxable income in the year the contribution is made. Money grows tax-deferred while in the account, but you'll pay income tax when you make withdrawals.
  • Roth IRA. Contributions are after-tax, but your money grows tax-free. Qualifying withdrawals during retirement are also tax-free.
  • 401(k). Offered through an employer, a 401(k) is a type of defined contribution plan that you put money into via payroll deductions. Many employers make matching contributions, which can help your money grow faster.

6. Implement your retirement investing plan

After all the planning is finished, it's time to implement the plan. If you haven't already done so, this is when you'll open your chosen retirement account types and create the investments you selected to start working toward your retirement goal. You can implement the plan yourself, or you may seek the help of a financial advisor, who can review your plan and put it into action.

7. Monitor your retirement plan

Retirement planning is an ongoing process that requires periodic maintenance to be sure your investment portfolio is meeting or exceeding the expectations you set in your retirement plan and investment strategy. Items to consider from time to time—usually at least once per year—include:

  • Portfolio rebalancing. To rebalance, you make trades (buying or selling securities) that will return your investments to their target allocations. In essence, this takes the gains from the overperformers and adds them back to the underperformers in your portfolio. Over time, rebalancing can help reduce risk and improve overall performance.
  • Investment review. It's a good idea to look over your investments to be sure they're still a good fit for reaching your goals. For example, as you get closer to retirement, you may want to make sure your asset allocation isn't too heavily tilted toward aggressive stocks.

Managing your retirement investments

While it's possible to create, implement and monitor your own plan for retirement investing, wealth management can have many moving parts. Knowledge and capability are only part of the equation when it comes to managing your own retirement assets; the time you have to dedicate and your level of interest are factors too. You may want to consider leaning on the experience of an objective and dependable financial advisor.

Connect with a Thrivent financial advisor for all your retirement planning needs, including navigating your investment options and their related regulations.

Investing involves risk, including the possible loss of principal. When considering a mutual fund or ETF, the fund prospectus will contain more information on its investment objectives, risks, charges and expenses. Investors should carefully read and consider this information prior to investing.
Hypothetical examples are for illustrative purposes. May not be representative of actual results.

While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.