Do your future self a favor: Start thinking about how to save for retirement today.
Whether you’re 22 or 42, it’s important to work on establishing and sticking to a retirement-savings plan. After all, some estimates state that $1 million or more is ideal for retirement … Chances are you can probably use all the help you can get.
But where to start? $1 million might sound insurmountable…
First, don’t panic. Take a deep breath and read on. This post will walk you through the basics to of common retirement savings methods as well as trading tips for a retirement-savings strategy.
Nope: There’s not just one way to save for retirement…
Ways to Save For Retirement
There are actually a variety of approaches to saving for retirement, including tax-deferred annuities, real estate investing, owning or investing in a business, and many more.
But since you’re on the StocksToTrade blog right now, for obvious reasons (um, just look at the name), we’ll mostly focus on trading-related ways to save for retirement in this post.
Brokerage Accounts for Retirement
Just to be straight: Any brokerage account can be used as a retirement account.
With a general brokerage account, depending on your broker and their capabilities/offerings, you can explore all sorts of investment vehicles, from stocks and bonds to ETFs to money market funds to mutual funds and more.
That said, it’s worth noting that a general brokerage account will not offer any sort of tax deferral, which can be a big draw for those saving for retirement. That’s where retirement-focused investment vehicles come into play.
When it comes to retirement savings, IRAs and 401(k)s are two of the most famous and popular types of accounts. They both offer tax deferment and different options for investing. Let’s explore further…
What Is an IRA?
You can’t talk about how to save for retirement without talking about IRAs. But … what are they, exactly?
IRA stands for individual retirement account. It’s an investment vehicle that’s specifically designed for retirement savings, allowing you to save for retirement on a tax-deferred basis.
Within the category of IRAs, there are several different types. Traditional IRAs and Roth IRAs are the two biggies, but there are plenty of other options too. Since there are some important differences between the two key IRA types, let’s briefly cover them:
Key characteristics of a traditional IRA include:
- You can deduct your contributions on your tax return
- Earnings can grow on a tax-deferred basis until you withdraw funds during retirement
- Retirees often find themselves in lower tax brackets than in their working life … Tax deferral can mean an overall lower tax payment, because it may be at a lower rate.
A popular variation of the traditional IRA is a rollover IRA. It involves funds that are ‘rolled over’ from a different retirement account. Eligible funds are moved from employer-sponsored plans such as a 401(k) and put into an IRA. From there, it’s like a traditional IRA.
With a Roth IRA, you take a different tactic with your savings by holding out on the tax break until later. Here are some key characteristics:
- No tax deductions on contributions
- Your withdrawals are tax-free when you reach retirement
- As long as you follow the Roth IRA rules, you don’t have to pay taxes on the earnings from your investments within the IRA.
401(k) might sound like R2-D2’s long-lost brother, but it’s actually a popular retirement plan that can help you save with immediate tax benefits.
What’s with the name? Nothing too exciting or “Star Wars”-related, unfortunately. 401(k) is named after the subsection where it’s recognized as part of the Internal Revenue Code.
This plan lets you contribute a portion of your pre-tax salary up to a certain amount based on your age. FOR EXAMPLE, in 2018, individuals up to 50 years old could contribute up to $18,500 per year.
Sometimes, your employer will even offer a matching program, where they contribute a certain amount for every dollar you contribute. So they might match half of your contribution (50 cents per dollar).
Why turn away free retirement money? If your employer offers this, take advantage of it by contributing as much as you comfortably can!
To access the funds in a 401(k), you need to wait until you reach retirement age. If you take out the funds before then, you’ll have to pay a pretty hefty penalty. Once you reach retirement age, though, you just have taxes taken out when you make withdrawals.
Trading With a 401(k)
Once you have some funds in your 401(k), you’re responsible for deciding how to invest your money.
It’s mostly like a regular brokerage account, but with a few differences … For one, you can’t withdraw the money until you reach retirement age. So how to use it?
The freedom of choice can be intimidating for some. And there’s a slew of choices: you could pursue mutual funds, long positions, or even use it for day trading.
Don’t let decision fatigue lull you into doing nothing!
First, assess your risk tolerance. Don’t know what your risk tolerance is? There are various tests online — your broker or the bank where you hold your 401(k) might even have a questionnaire that can aid you in the process.
Regardless of your risk tolerance, be sure to embrace diversity in your account, just as with any account. Mix small-cap and large-cap stocks, and stocks and mutual funds across a number of different sectors. This is basic common sense and falls under the ‘don’t put all your eggs in one basket’ logic.
You Can’t Short Stocks
One difference between a 401(k) and a regular brokerage account is that you can’t short stocks with your 401(k). This is a method used by day traders to take advantage of waning stock prices. It’s legal and can potentially be a successful trading strategy, but you can’t do it with your retirement fund.
Trading for Your Retirement
So when it comes to trading for your retirement, what kind of approach should you take?
Ultimately the answer’s up to you. It depends on your goals and risk tolerance.
To help you stay safe and minimize risk, here are some tips for conservative approaches to trading for your retirement:
- Look for growth potential. A famous mantra in trading is ‘buy low, sell high.’ But you could make a case for the less-catchy ‘buy moderately and watch it continue to rise.’
FOR EXAMPLE, even if a stock isn’t at its 52-week low, the idea of further upward growth could potentially make it a worthwhile stock to trade. Even a big expensive stock like Amazon could be considered growth stock — if you do your research and determine that it still has room to grow.
When approaching stocks to buy, don’t just look for the cheapest or best values. Look for those that have a good balance of price with strong fundamentals. Then follow the news and the chart to see if there’s potential for further growth.
- Take advantage of different order types. In a retirement fund, you may not be trading extremely frequently, so you might not think it’s a big deal to just buy and sell using market orders.
Don’t fall into this trap! Seconds can matter and a security price can change quickly. It might not be a huge amount, and you may not think that paying an extra $5 or $10 matters. But these costs can add up over time, depending on how many shares you trade…
Instead of market orders, take the time to make trading plans. That can help you pre-determine your trade entry and exit points. Then, place either limit or stop-loss orders to execute your trades when your stocks hit YOUR criteria.
By taking advantage of these automatic order types, you can help remove some of the emotions from your trading. That means you can better stick to your plan and work to minimize losses and maximize gains over time.
- Focus on dividends. What’s a dividend? It’s a payment that’s issued to you, the shareholder, by the company that issues the stock. They’re typically issued quarterly, though there are exceptions to this, such as a one-time event like a merger or sale.
Dividends can be issued out as cash (cash dividends) or as additional stock (stock dividends).
Dividends are common with large-cap companies. Why? Because they’re big and stable, but usually kinda boring. The stock prices don’t usually make big moves, so they’re not necessarily ‘sexy’ or appealing stocks.
The dividends are the company’s way of saying, “thanks for investing.” It can be a means of enticing and retaining you as a shareholder.
Dividends can allow you to receive mini-bonuses based on the company’s performance. They can be part of a long-term plan for retirement savings, where you can reinvest the dividends into the company, increasing your position gradually and the amount of future dividends too.
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Even if it’s still a long way off, it’s important to start thinking about your plans for retirement savings. With longer lifespans and rising expenses, you want to make sure that you’re styling and comfy in your golden years, right?
By educating yourself on how to save for retirement, you can begin to formulate a plan of the best methods and strategies for you. Do your future self a favor and put your plan into action today!
How old do you think you’ll be when you finally retire? What are your retirement saving and trading strategies? Leave a comment and let us know!