Investing for retirement is a necessary evil for most people. Certainly, most of us would rather simply spend all of what we earn and ‘live for the moment’. But the reality is that at some point, retirement will come along and an income from a portfolio of investments will be required.
Fortunately, retirement is a known quantity in terms of there being the potential to plan for it decades in advance. With that in mind, here’s a plan of action for investors seeking to do just that.
Tax advantages
Perhaps the most important part of retirement planning is taking advantage of tax breaks that are available. The simplest form of this is investing through a pension, with contributions not being subject to income tax on entry. Opening an ISA is another sound option in this respect. It is made up of contributions of post-tax income, but there is no tax to be paid on withdrawals. Furthermore, an individual can withdraw money from an ISA at any point, which means there is more flexibility on when retirement can begin.
Longevity
Another key factor when investing for retirement is longevity. Since investments within a retirement portfolio are for the long term, there is likely to be a greater focus on the sustainability of the companies that are held. For example, it may be prudent to invest in sectors which are likely to still be in existence in the long run, while seeking out companies with strong balance sheets may be a sound move. In this regard, healthcare companies, as well as consumer goods stocks could be of interest. Both are likely to enjoy improving trading conditions as the world’s population grows.
Similarly, investing in new forms of technology could be a shrewd move. At the present time there is a significant focus on blockchain and how it could disrupt existing industries. Meanwhile, new developments in the tobacco industry could worthy of an investor’s focus, while the transition to cleaner forms of energy may be a growth area in the coming decades.
Diversity
Of course, it is difficult to predict which industries will become larger and more profitable for investors in the long run. For example, the internet has proved to be more of an evolution than a revolution, and it has meant that dotcom companies have generally underperformed. Therefore, it makes sense for investors to diversify their retirement portfolios in a wide range of stocks, industries and geographies. By doing so, they reduce overall risk and may not harm their potential return to a large degree.
Income
When in retirement, dividends play a key role in providing an income. At the present time there are a number of FTSE 100 stocks offering 4%+ dividend yields. This is therefore a buyers’ market when it comes to income investing. While buying dividend shares may not be the most exciting means of investing your hard-earned wealth, the compounding of reinvested dividends could help to bring retirement a step closer.