One of the biggest milestones you will face in your life is retirement. If you want a successful retirement, though, you are going to have to invest. Few people actually build wealth at a rate that results in a secure retirement when they are only using a savings account.
In order to build wealth for the future, you need to invest some of your money. As you determine how to best save for your retirement, don’t forget to invest. And as you invest, here are 3 things to keep in mind as you build your retirement portfolio:
- Not Everything Should Go in a Tax-Advantaged Account
The first thing you have to realize is that not everything belongs in a tax-advantaged retirement account. Tax-advantaged accounts like IRAs and 401(k)s are great for investments that are inefficient when it comes to taxes. Many stocks are great in these accounts, as are some types of bonds.
There are some investments, though, that are already tax-efficient. There is no reason to put municipal bonds in a tax-advantaged account, since many of them are already exempt from federal taxes.
Before you invest, consider the tax efficiency of the investment. Be careful about which assets you hold in your tax-advantaged retirement account. If you want to get the best bang for your buck, you need to put inefficient investments in your account so that you can reduce some of your tax liability.
- Consistency is Key
With any long-term investing, consistency is one of the most important strategies you can employ. While the stock market shows volatility on a day-to-day basis, over time the trend line tends to smooth out a bit (and head higher). As a result, you can’t let the short-term volatility in the markets prevent you from consistently investing. Indeed, when you consistently invest, using dollar-cost averaging, down days in the market can be a good thing, allowing you the opportunity to buy more shares with your money.
Also, don’t trade too much. One of the best strategies is to choose some low-cost funds for your retirement account and then consistently invest in them. Don’t withdraw money early from your 401(k), since that can result in direct losses, as well as opportunity cost.
Over time, the consistency of your investment will pay off. Start now to invest in a retirement account, and if you continue to invest over time, you will see better results.
- Remember to Rebalance
Long-term retirement investing isn’t about “setting it and forgetting it”. While constant trading is a sure way to erode your returns and reduce the effectiveness of your portfolio, you don’t want to eschew trading altogether. Sometimes, your portfolio needs to be rebalanced. If your portfolio’s asset allocation is no longer meeting your needs, or if it’s gone off track, you need to change things around a little bit. Once or twice a year, look at your asset allocation. If things are off by more than 3% to 5%, do a little trading to bring things back in line. Occasional tweaks will help your retirement portfolio run with maximum effect.