Consistently investing over the course of your career is a great way to position yourself for a comfortable retirement.
At different stages of your career, your investment strategy may change.
Here are some thoughts on how to leverage the power of investing to give yourself the best chance at a great retirement.
If you're planning to retire someday and you want to have a good degree of financial flexibility during retirement, then investing in the market -- through individual stocks, exchange traded funds (ETFs) and/or mutual funds -- can be a great way to achieve your goals.
Over the course of your lifetime -- unless you're making a lot of money or live extremely modestly on a reasonable salary -- you're going to find it hard to simply put away enough money to retire. The money you put away should, ideally, be working for you and growing at a pace (much) faster than inflation.
To that end, here are couple of thoughts on some strategies to invest for retirement.
Save, Save, Save!
It's hard to invest without capital with which to do so. That's why it's important to not just make good investments but, to the best of your ability, put away a significant chunk of your income for retirement. If your employer offers a 401(k) plan and also matches your contributions up to a certain percentage of your income, then try to contribute at least enough so that you're taking full advantage of the match. And, be sure to research the funds that your 401(k) money is being put into to make sure you're picking one that's well managed and can deliver solid returns.
But you shouldn't just rely on that -- try to calibrate your daily spending so that you have a significant amount left over each month, if possible, to contribute to either a tax advantaged brokerage account (like an IRA) or even a taxable brokerage account. This might mean driving a less-fancy car, or living in a less extravagant house, but by keeping your household expenses in check to allow you to put more away will allow you to retire earlier, more comfortably, or both!
Invest for Growth Early On, Transition to Income Later
The ultimate goal of investing for retirement should be to have enough money by the end of your career so that you can set up your portfolio to generate significant amounts of passive income. Indeed, in an ideal world -- at least from my perspective -- you should be aiming to never actually have to touch your principal and simply live off of interest and/or dividend payments (as well as whatever you can get from social security, pensions, and so on).
To get to that point, though, you'll need to actually have significant amounts of capital by the time you retire. That's why it makes sense to not only save aggressively when you're younger (to allow the power of compounding to work for you), but to potentially invest in stocks with the potential to outperform the overall market. Now, not all such picks are going to be winners -- investing in higher-growth companies can be significantly riskier than betting on well-known "blue chip" stocks. However, if you make well-researched bets and you learn and apply good risk management techniques (taking risks isn't the same as being reckless!), then your chances of success rise.
Over time, though, as you get closer to retirement, you may want the risk profile of your portfolio to evolve. You might want to start shifting parts of your portfolio to dividend-paying stocks that consistently grow their dividends each year. You might also want to start investing in larger, more established names at that point, too, to further reduce your risk profile. And you may even want to start looking at different asset classes beyond stocks, such as bonds.
The reason for this is simple: The closer you are to your desired retirement date, the sooner you're going to need that money. That means you'll have less time to wait for your portfolio to recover, either by waiting for the stocks that declined to rise again or by putting what you have left into new bets and waiting for them to play out. You also will have fewer working years left to save (and although your income has likely grown over the course of your career, your standard of living may be commensurately higher, too).
That's not to say that you shouldn't make some bold, higher-risk investments as you grow older, but these bets should represent smaller portions of your portfolio over time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: All views expressed in this article represent my own opinions and not those of my employer.