There are quite a few ways to invest and save for retirement. Choosing the right option depends on individual factors, including your remaining working years and your financial goals. To determine how much you need for a comfortable retirement, it’s important to estimate future spending.
Begin by looking at current expenses to project future spending. You can use the 80 percent rule of thumb. That aims to replace 80 percent of the income you earn before your retirement to use in your non-working years.
You can use our Interest Savings Calculator to see how your money could grow over time given your contribution amounts, rate of return, and starting balance.
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Average Return on Retirement Investments
Each way of investing has its own unique benefits as well as disadvantages. The return on investment and risk levels can vary. Below are some of the more common ways to invest along with their upsides, downsides, and average return on retirement investments.
On average, the stock market has the best return on investment. However, there is more risk as well. The stock market demands that you either educate yourself on investments or that you work with a professional financial asset manager. Many investors are also increasingly using robo-advisors to invest in stocks. The average stock market retirement rate of return is usually around 10 percent over the long-term.
Bonds are essentially debt providing interest payments to the debt holder. A company can issue a bond, which means then investors are providing them with a loan that they repay over time. Bonds can be issued by local and federal governments as well. Returns on bonds can vary quite a bit depending on the origin of the debt, according to Morningstar. Long-term government bonds have provided returns on average from 5 percent to 6 percent. Lately, U.S. 30-year Treasuries are offering a roughly 3 percent return.
Investment funds pool money from many investors, and they provide an easy way to diversify and protect against risk. Funds are professionally managed. One option is a mutual fund, which has a 20-year return averaging 4.67 percent. Exchange-traded funds, or ETFs that trade as stocks, have a similar rate of return. Closed-end funds have a cap to the buy-ins and have average yields of 6.37 percent.
An IRA, or individual retirement account, is one of the most popular ways people save for retirement. This way of saving has tax advantages. The three primary types of IRAs are the traditional IRA, the Roth IRA, and the Rollover IRA. There are slight differences in these accounts in terms of taxes and contributions. The rate of return for an IRA depends very much on the types of investments it includes.
A 401(k) is a savings and investment plan that employers offer to their employees. The objective is similar to an IRA in that it provides tax benefits to saving money for retirement. While every plan is different and has different areas of diversification, expected average annual returns often range from 5 to 8 percent.
Annuities can be good for investors who are already in retirement, or who are close to it. They provide guaranteed income either for the life of the person or for a period of time. These income options are sold by insurance companies. Specific categories include fixed annuities, variable annuities, and even an equity-indexed annuity. The average rate of return for fixed indexed annuities is around 3.27 percent.
Real estate investing is an extremely broad concept. It can range from buying and flipping properties to purchasing rental properties and using that as an income stream. As of recently, there is a growing interest in real estate crowdfunding to help people invest. For commercial real estate, the average returns are usually around 6 percent. For residential real estate, the average 20-year returns are around 7.5 percent.
Real Estate Investment Trusts
Real estate investment trusts, or REITs, allow investors to invest in real estate similar to how they invest in a mutual fund. Investors pool their money for ownership in different real estate interests. The average 20-year rate of return for REITs is 11.8 percent.
How to Maximize Your Retirement Rate of Return
Numerous investment options are available to help you save for retirement. Base your investment on factors like your age, your level of risk tolerance, and what your estimated retirement needs will be. If you’re younger, you can go with a riskier strategy such as stock market investments. If you’re nearing retirement or already in retirement, you’d more likely opt for a lower-risk option like an annuity.