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3 of the Best Ways to Invest for Retirement

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Retirement savings is something that many adults think about, but don’t always act on. The younger you are, the less likely you’re considering how you want to live out your golden years.

But for those who plan early, it can be the difference between working into your 70s versus your 60s. Or, it could be the difference between having a vacation home versus struggling to pay the bills at home. 

Image source: Getty Images.

There are many upsides a 401(k) can deliver for retirement. Let’s take a look at three more ways to take advantage of investing for your post-work years.

1. Invest in the whole market early on in your career

Several institutions now offer investment accounts for teens because investing early in life can be so rewarding. Dating back to 1957, the average annual rate of return for the S&P 500, which reflects the broader stock market, is 10.7%. 

When you’re first starting out with small amounts to invest, those returns don’t seem like much. But if you stick with it over 30 years, add to the investment each year, and include the passive income from dividends, it could allow you to retire much earlier than those who begin investing much later.

The Fidelity 500 Index Fund (FXAIX) provides one great way to invest in the overall market through a single fund that tracks the performance of all common stocks publicly traded on U.S. exchanges. Since the fund’s inception in 1988 it has produced an average annual return of 11% over the long run.

The advantages this fund provides investors are plenty. For those who may have less to invest at first, you can get one share for $140. Plus, there is no minimum purchase, such as the $3,000 minimum initial investment required by the Vanguard Total Stock Market Index Fund Admiral Shares. And lastly, starting out with a fund that tracks the full market provides diversification, meaning you won’t be subjected to a potential decline of one particular sector. The one downside is a bear market, which for long-term investors should not be a deterrence anyway.

For investors looking to build or pad a portfolio that will work as part of a long-term strategy toward funding retirement, getting started at an early age and making use of the full market can be a great start.

2. Passive income from dividends can be your best friend

Passive income can add to your investment gains. After you make your initial investment, that investment can gain passive income in the form of dividends — money you get on a quarterly basis based on the number of shares you own, but at no additional cost to you.

Each time you receive a quarterly dividend you can reinvest that money to purchase additional shares. Over time those additional shares will result in more dividends. As your number of shares increases, so too does the value of your total dividends.

Let’s say you invest $10,000 in the Fidelity 500 fund at $140 per share. You’ll be able to purchase 71 shares of the fund. At a 1.35% annual dividend yield, your portfolio will grow to 72 shares after year one, and 73 shares after year two through dividend reinvestment. By the end of 30 years, with the fund’s share price growing by an average annualized 11% per year, and dividends continuing to mount, the total gain from dividends alone could be over $4,900.

That Fidelity fund is just one example. There are plenty of Dividend Kings that have been increasing annual dividends for over 50 consecutive years, like healthcare giant Amgen (AMGN -1.29%), which pays a $7.76 per share dividend per year, working out to a 3% dividend yield. That’s much higher than the Fidelity fund, but it does come with the risk associated with relying on the performance of an individual company stock.

Using Amgen as an example, a $10,000 investment would get you roughly 39.5 shares at $253. After 30 years the dividends alone could be worth over $60,000, based on a 10% dividend growth rate, plus an average 20% increase in share price — as it has done over the past 10 years. That could equate to income of $500 per month in dividends alone by year 30, at which time you may opt to turn off the reinvestment option in order to enjoy the monthly income.

3. Grasp opportunities as they come

Throughout your employment years you’ll likely experience wage increases. On average, people get two year-over-year increases exceeding 20%, and one at 10%. If you can manage to put some of that increase toward strengthening your investment positions, or to ramp up a pre-tax deduction into a company-matched 401(k), it can lead to larger gains over the long term. 

If you’re one of many who might have had limited funds earlier in life, or just didn’t think retirement age would creep up so quickly, don’t feel like you’ve missed the opportunity to invest for those golden years. Taking advantage of catch-up opportunities can have a positive impact on your retirement planning. Turning 50 can have a deer-in-the-headlights effect — take it from me. You wonder where the time went, and begin to wonder what to do with the time left. It’s also a point at which the average salary begins to level off, meaning many people are at peak salary. But it can also present opportunities for savvy investors.

The 401(k) contribution limit jumps from $20,500 per year to $27,000 when you turn 50. If you put that extra $6,500 a year into a plan that earns a 6% annual return, the additional $97,500 in contribution will be worth $160,000 by the time you’re 65. It’s also a good time for a portfolio wake-up call.

As you near retirement, minimizing risk can protect what you’ve already gained. Consider moving a portion of your investment to a retirement target date fund such as the T. Rowe Price Retirement 2035 Fund (TRRJX) or the Vanguard Target Retirement 2035 Fund (VTTHX). Both focus on a mixed allocation of stocks and bonds, actively managed as the years to retirement tick down, reaching the most conservative allocation in the year listed in the fund’s title. This helps produce the highest rewards possible while keeping risk at a moderate level. Both funds produce a 10-year average annualized return between 8.6% and 9.3%. The Vanguard fund has a higher focus on foreign stocks and domestic bonds than its counterpart, which focuses more heavily on domestic stocks.

Having a plan is the key

No matter what your strategy is for funding your golden years, creating a plan is a key first step. These three ways to invest for retirement can put investors at any stage of life onto the right path to take advantage of the opportunities presented.