What to Look for in a Retirement Investment
The stock market typically rises more often than it falls, even over periods as short as three years. What this means is that, while there might be a dip one year, the other two years often make up for the decline in stock values. Essentially, the entire market is a much safer bet than any individual stock in it. And while you might not be buying the next Apple at its IPO, index exchange-traded funds that mirror the market allow the long-term investor the opportunity to grow rich slowly.
Index ETFs have two other significant benefits. First, they require virtually no maintenance, which means you’re not going to be paying large management fees.
Lower fees can add up to tens of thousands of dollars over the course of your retirement investing. For example, a $25,000 portfolio can become $227,000 over 35 years with 0.5 percent fees. Paying 1.5 percent fees for the same portfolio only yields $163,000. That means, despite the “low” fee of 1.5 percent, the portfolio has lost $64,000 by comparison. In contrast, ETFs offer significant growth over time with low fees, the best way to invest for your retirement.
Additionally, ETFs might help you keep more money from being taxed, compared to mutual funds. That’s because ETFs are only taxed on their capital gains when you sell them. Mutual funds are also taxed every time there’s a trade within the fund. With long-term capital gains tax rates at 20 percent, that’s no small amount.
Finally, index ETFs are highly diversified. Often, mutual funds only appear to be diversified. For example, if a mutual fund is heavily invested in the energy sector and gas prices take a tumble, your retirement investment probably will too. Index ETFs, however, are broad investments against the entire market. So while the value might shrink in the short term, over a longer timeline it’s possible to see serious yield, compounded over time as you reinvest your returns.
Keeping Your Fees and Taxes in the Basement
When investing in ETFs, you can keep your taxes and fees low for that retirement instrument. It’s no longer necessary to hire an expensive financial planner to plan for your retirement. FutureAdvisor uses state-of-the-art algorithms to help grow your investments in two separate ways:
- First, you’re going to keep your fees low by cutting out the unnecessary expense of having your money actively managed.
- Second, our algorithms will buy and sell your ETF to take advantage of taxes in ways that not even the best financial planner could -- because always-on software can be constantly monitoring your account, and can make some trades feasible by automating a lot of the paperwork away.
The sooner you start putting your money into an ETF, the more it will likely grow through compound interest -- helping you retire sooner.