Retirement Investing – What To Invest In?

Rule 1 of 3 for Retirement Investing:

  1. Put your money where it averages the greatest returns long term (10+ years)
  2. Treat retirement accounts as insurance for not having money when you’re old
  3. Passive indexing and rebalance periodically

Investments generally come with growth on your investment but also have risk.  Generally, the higher the risk, the higher the returns.  Now when I say the put your money where you receive the greatest returns, this comes with a caveat that you need to balance your risk to a level that you can tolerate.  For me, the biggest risk I will take with a significant amount of my money is investing in index fund stocks for about a 10% return and all the price fluctuations that come with it.

Caveats: (What I would advise against)

  1. Don’t go after crazy high returns, because you could ending losing everything.  Like investing all your money in a single stock. I would suggest investing in index funds that spread out the variance by combining several stocks.
  2. As you get older and the time approaches to when you will be needing your retirement funds, you may want to lower your variance for more stability.  Even though the stock market recovered just fine from the 2008 crash, that year the S&P 500 did lose about 34%.  Not fun losing $1M if you just retired and your $3M goes to $2M!
Investments and their returns

A savvy investor knows the average return on their investment.  For example, a well managed S&P500 fund returns about 10% historically.  US Government bonds historically return 5-6%.

Stocks Via Index Funds

I’m primarily talking about a S&P 500 Index fund such as VOO which returns historically around 10%.  This is about the most “risky” of an investment I’ll make with a significant amount of money.  This is where I keep most of my money and where Warren Buffett suggests you should too!

US Bonds

Bonds return around 5-6% historically and are their lower average returns compared to stocks is rewarded with less volatility.  Since this is a lower volatile investment, this is something we can go towards when you get closer to retirement age.  At a younger age you can be 100% stocks and 0% bonds, but at an older age, you can start transitioning to a different split such as a 50%/50% split.

BlackJack with Vegas Odds

Playing Vegas odds blackjack with “by the book” strategy returns -0.511734% with some crazy variance. That means if you play 20 games of blackjack at $5 a hand ($100 total play), you would expect to get back $99.49. Not a good investment, but pretty fun >_<

401k With Company Match

401k is a retirement plan where you are allowed to put pre-taxed money to grow and some employers match your contribution.  Here’s an example with company match.

  1. My company offers a 100% match up to 5% of my salary per year.
  2. Let’s say I make $100,000 per year just for mathematic simplicity.
  3. Let’s say I put in 5% of my salary which is $5000.  The company will match 100% of the $5000, so I if i invest $5000, my balance will be $10,000 with my company’s match.

So by taking advantage of the company match, I am instantly getting a 100% return!  Now I get to earn about 10% on $10,000 worth of money in my 401k.  That’s pretty awesome!  It gets better too!  Since I put my $5000 pre-tax, it lowers my income to 95k, so I save taxes on $5000 which is like $2000!

My $5000 investment into the 401k has earned me an extra $5000 in my retirement account plus I saved $2000 on my income tax.  Eventually when you pull out your money from your 401k, you will have to pay taxes on it, but it’s totally worth it for the benefits now.

Paying off credit cards or other high interest loans

If you loan interest rate is 10% or higher you should pay this off and lock in the 10% return.  It sounds weird to consider this an investment, but it is in terms of your net worth long term.  Also it just feels good being debt free!

Real Estate

There is obviously multiple ways to invest in real estate and there are tax benefits to various methods.  The easiest way is to buy REITs which is very similar to buying stocks.  I personally own some Vanguard VNQ.  But I do feel like the S&P 500 historically has been better than Real Estate Investments with lower volatility and better returns.  So I would really rather emphasize stocks, but it’s not bad to diversify as well.

Also owning property, renting out your property, residential and commercial all have their own rates of returns.  Unless with index funds, you generally own 1 or a few units and cannot spread out the variance such as buying an REIT.  These are various forms of investing in real estate and I have 1 condo i’m renting out so that’s a lot of my assets already tied in Real Estate.  So the bulk of my investing is in low cost index funds.

Savings Accounts and CDs

These investments are very low risk and therefore the returns are generally the lowest.  As of this writing, the highest APR for a savings account is 1.3% at Synchrony and 2.25% for a 5 year CD at Ally Bank.

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