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3 Best Ways to Invest for Retirement

We all want to reach old age with peace of mind, without financial worries. Below, you will find investment strategies that can help you achieve this goal and provide a comfortable retirement.

    Most people need to save more money for retirement. According to a report from Vanguard, the average American had about $$ 141,500 saved for retirement. With the recommended annual withdrawal rate of 4%, this will only give them about US$ 5,660 per year to live on in retirement.

    Given these numbers, future retirees need to increase their savings rates and returns to retire comfortably. Here are the three best ways to invest in retirement to grow your nest egg to a more significant level.

    Keep It Simple with Index Funds

    The easiest way to invest for retirement is to buy an index fund. These exchange-traded funds (ETFs) aim to provide returns that match the underlying stock market index, such as the S&P 500. The best index funds have low ETF expense ratios, allowing investors to keep more of their returns.

    The two best options for future retirees to consider are: Vanguard Total Stock Market ETF (VTI -1.03%) or the Vanguard S&P 500 ETFs (FLIGHT -1,07%). The Total Market ETF offers investors broad exposure to the entire U.S. stock market, as the fund holds about 4,000 stocks. Meanwhile, the S&P 500 ETF holds shares of the country's 500 largest companies. Both ETFs have extremely low expense ratios of 0.03%. These funds allow investors to earn the average return of the stock market. For the S&P 500, this was about 9.4% per year over the last 50 years. At this rate or return, a monthly investment of US$ 250 would grow to US$ 1 million in about 37 years. This would provide a retiree with approximately $40,000 in annual income at an annual withdrawal rate of 4%.

    Boost Your Returns With Dividend Growth Stocks

    Investors can earn higher returns than an index fund. While some investment options require you to take on more risk, investing in dividend-producing stocks (i.e., companies that consistently increase their dividend payments) offers the ability to earn higher returns with less risk.

    According to data from Ned Davis Research and Hartford Funds, companies that have initiated or consistently increased their dividends have earned an annualized return of 10.7% of total return over the past 50 years. Additionally, they have achieved higher returns with lower volatility than the S&P 500.

    Investors interested in adding dividend growth stocks to their retirement portfolio can purchase an ETF focused on companies that grow their dividends or individual dividend stocks. One of the best ETF options is the iShares Core Dividend Growth ETF (DGR -0.52%). This ETF holds about 450 dividend-paying stocks with a track record of sustained growth.

    Meanwhile, investors have plenty of individual stocks to choose from to add dividend producers to their portfolios. A great place to start is the list of Dividend Kings, companies with 50 or more years of steady dividend growth. Notable names on that list include consumer products giant Procter & Gamblewith 66 years of dividend growth and beverage giant Cokewith 60 years of constant increases.

    Improve your returns and reduce your risk with REITs

    Real estate investing is another retirement strategy because it offers the potential for passive income and price appreciation. While a promising retiree can purchase investment properties to reap these rewards, investing in real estate investment trusts (REITs) is an even simpler alternative. Historically, REITs have produced higher returns than stocks with lower volatility.

    Retirement-oriented investors can buy REIT ETFs or shares of a single REIT. One of the top REITs to consider is Real estate income (OR -0.40%). It lives up to its name. The REIT pays an attractive monthly dividend (with a current dividend yield of 4.4%) that has grown steadily over the years. It has increased its earnings in each of the last 101 consecutive quarters. This ever-increasing dividend, driven by rental growth and property acquisitions, has helped Realty Income achieve an average annual total return of 14.4% since going public in 1994.

    Great Ways to Grow Your Retirement Nest

    Most people need to save and invest more money for retirement. They also need to make sure they are getting the best risk-adjusted returns on their money. For this reason, index funds, dividend growth stocks, and REITs are among the best investments a future retiree can make because they historically produce strong returns with less risk than many alternatives. This will help grow a retiree's portfolio to a larger size so that he or she can enjoy a more comfortable retirement.

    Matteo Di Lallo has positions in Realty Income. The Motley Fool holds positions in and recommends the Vanguard Index Funds-Vanguard Total Stock Market ETF and the Vanguard S&P 500 ETF. The Motley Fool recommends the following options: US $ 47.50 for January 2024, called Coca-Cola. The Motley Fool has a disclosure policy.