The practical need to invest for retirement is based on several important facts. According to the U.S. Department of Labor, individuals will need as much as 90 percent of their working income during a retirement period that will last an average of 20 years. Recent Census Bureau statistics show that 80 percent of current workers think they will not have enough money saved for their retirement.
The nature of investing for retirement has also changed during the past 25 years. Many employers have reduced their spending for traditional fringe benefits such as healthcare and retirement plans. Coupled with these negative trends are higher rates of unemployment and uncertainty about long-term career employment. For most individuals, this translates to a need for each person to take a larger role in managing and investing their retirement funds.
Investing Is Not the Same as Saving
Saving for retirement is often confused with investing for retirement. The ability to save money does represent a vital first step by setting aside funds that can then be invested. But the act of saving in isolation often means depositing funds in a bank account or government securities paying a low rate of interest. For example, 7-year U.S. government bonds currently provide an annualized yield around 2 percent. This minimal rate of return is unlikely to satisfy the long-term investment goals for most individuals.
One key to successful investing for retirement is the ability to achieve long-term financial growth that exceeds the rate of inflation by several percentage points. As reported by the Bureau of Labor Statistics, the average annual inflation in the United States has been 3.88 percent during the past 70 years. To achieve a net annualized investment return of 5 percent or more after adjusting for inflation during this period, an investor would need to realize annualized growth of about 9 percent each year. With this practical perspective, a 2-percent return from a U.S. Treasury bond would fail to even keep up with the average rate of inflation.
Analyzing Prudent Retirement Investments
The specific investment vehicles for each individual will vary according to personal preferences and how much control is desired. Based on historical returns, some of the most effective choices have included common stocks, commercial real estate and buying privately-owned businesses. Regardless of which financial alternatives are under consideration, individual investors must be prepared to actively manage the investment portfolio that represents how comfortable their future retirement will be. As noted above, a conservative working goal is for retirement investments to grow by an annualized long-term rate of 9 percent or more.
Investors should expect to need some expert help with the investment research needed to effectively analyze opportunities. The ability to successfully incorporate financial concepts like fundamental analysis and return on investment can eventually become easier with actual practice. The most prudent and successful investment strategies for retirement involve a time period of at least 25 years. For example, if $5,000 is invested each year for 25 years with an annualized return of 8 percent, this will result in a tax-free total of $399,772 or $324,235 if taxes are paid each year. Successful investing for retirement does not require a tax-free investment account. However, potential financial returns will be 23 percent higher with the benefit of retirement tax savings when available.
– Research Optimus