Create a Savings Plan
Create a savings plan based on how much money you'll need to retire comfortably. Most financial planners agree that one needs about 80 percent of his or her preretirement income to maintain their standard of living after retirement.
Try to maximize contributions to any tax-sheltered savings plans available to you. If your company sponsors a 401(k) or 403(b) plan, you can have your employer withhold a percentage of your pretax salary and invest it in the plan. Your investment grows tax deferred until it is withdrawn. Many employers match a certain percentage of employees' savings, giving you additional money toward retirement.
An Individual Retirement Account (IRA) is another type of savings plan and is available to almost everyone. IRAs are established separately from your workplace retirement accounts.
Cut Spending
Another way to save is by cutting down on some of your spending. Calculate where your money's going each month and revisit the list to find out where you may be able to cut out extra spending.
Limit the use of credit cards, especially if you don't pay off your balance at each billing cycle. The money you save by avoiding interest charges on credit card balances could be set aside for retirement.
Allocate Your Assets
Once you have a retirement savings plan in place, concentrate on growing your savings with a good investment strategy. You should understand the risks and returns of each investment available and allocate your money in order to achieve maximum return at an appropriate risk level.
Take Advantage of Diversification
It is important for every investor to diversify or invest money in several different types of investments. This is because diversification may help smooth out market volatility, mitigate possible losses and protect your retirement savings. Most people think of diversification in terms of different asset classes: stocks, bonds and money market instruments. But you can diversify within an asset class, too. For example, you can invest in different types of stock funds based on company size.
A mutual fund provides you with a degree of diversification by investing in a variety of securities. You can create another level of diversification by investing in an array of different mutual funds.
Follow Asset Allocation Models
The concept of dividing your money among several different kinds of investments — stocks, bonds and money market investments — is called asset allocation.
Appropriate asset allocation begins with understanding your goals, investment time horizon and risk tolerance. No one portfolio fits everyone. Understanding that different investments may have different risk and return objectives, and knowing how to match investments to your personal financial goals, is key to a successful asset allocation strategy.
Grow Your Savings
Maximize your investment returns within the context of your investment objectives, time horizon and risk tolerance.
Dollar Cost Averaging
When it comes to successful investing, time, not timing, works. Investing a fixed amount at regular intervals, usually through an automatic investment plan, is called dollar cost averaging. What are the benefits? The answer is simple: Since the amount you invest is constant, you automatically buy more when the price is low and less when the price is high. Historically, investor's average cost per share has usually been lower than the average market price per share. So if you buy 5,000 shares during your lifetime, you usually will spend less to acquire those shares using dollar cost averaging than you would if you tried to time the market.
Of course, automatic investing does not ensure a profit, nor does it protect you against a loss in a declining market. And it won't keep you from losing money if you decide to sell your shares when the market is down. Because prices fluctuate and automatic investing includes investing when prices are down, investors should consider their financial ability to continue regular purchases during periods of low price levels.
Understand the Importance of Risk
Too often, investors allocate their retirement dollars too conservatively, decreasing their chances of achieving their retirement goals. There is a correlation between the amount of risk you assume and the potential return of your investment: the higher the investment risk, the higher the probable return. Remember, you're investing for 20, 30, sometimes even 40 years. These long investment time horizons generally will decrease market volatility over time, allowing you to take on more risk in the short term for a potentially greater long-term return.
Look Forward to Retirement
source: Mutual Fund Investor's Center
