Many people have good intentions when it comes to investing for retirement. But even the best-laid plans can go awry, especially if your investing habits aren't as routine as buying groceries or paying bills. To avoid falling short of your investment goals, which could delay your retirement, you can automate your investing activities. While you'll have to do some extra work initially, automation ensures that you continue investing at a steady pace. Learn how to automate investments in five easy steps.
Automate investments in an employer-sponsored retirement account. Consolidate your investment accounts. Automate investments in other retirement accounts. Establish an automatic investment plan. Automate dividend reinvestment.
1. Automate investment in an employer-sponsored retirement account
One of the easiest automatic investment options is a work-related retirement plan such as a 401(k). If the company you work for offers this benefit, take full advantage. At a minimum, try to maximize your company's matching contribution. Many companies will match 50% to 100% of every dollar you contribute up to a certain percentage of your salary. By not taking advantage of this opportunity, you miss out on part of your total compensation package. And, in the process of making sure you receive your full work retirement benefit, you've helped automate your finances.
Most employer matches cap out before you reach the 401(k) contribution limits, which are $19,500, or $26,000 if you're 50 or older, in 2021. However, that doesn't mean you can't max out this plan if you like your investment options. Doing so is a good way to invest automatically in the stock market.
2. Consolidate your investment accounts
The average person changes jobs about every five years. Unfortunately, many forget to take their 401(k)s with them. The Center for Retirement Research at Boston College estimates that Americans have left behind 24 million old 401(k) plans with $1.35 trillion in assets from their old jobs.
While it might be a hassle to roll over an old 401(k) into an IRA, that move has several benefits:
Managing your own investment portfolio is easier when you have all your old work-related retirement accounts consolidated into one account.
It could save you money since some 401(k) plans have higher fees.
It could improve your returns if you left your old 401(k) funds in a lower-return investment.
In addition to consolidating your old work-related retirement accounts, you should consider doing the same if you have investment accounts at multiple brokers. Putting everything in one place will make it easier to simplify and automate your investments.
Also, this is the time to consider setting up other new automatic investment accounts. For example, if you have kids, you might want to set up a 529 plan to help save for their educational expenses. You should also see if you're eligible for a health savings account (HSA).
3. Automate investments in other retirement accounts
You could max out your 401(k) plan and call it a day. However, many choose to stop at their employer match because they'd prefer to put the rest of their money in a different investment vehicle. Sometimes a 401(k) isn't the best automated investing option because of high costs or limited investment choices.
If you're wondering how to automate investing, another good move is to set up a monthly transfer to your individual retirement account (IRA). Consider maxing out your IRA. For 2021, the IRA contribution limit is $6,000, or $7,000 if you're older than 50. So if you wanted to max out your IRA by making a monthly deposit, you'd set the automatic transfer at $500 a month if you're younger than 50.
If you have more money you want to invest after maxing out your retirement plans, consider setting up additional automatic deposits to your consolidated brokerage account, 529 plan, or your HSA.
4. Establish an automatic investment plan
Once you have regular money flowing into your retirement plans and other investment accounts, consider automating investment purchases so that your cash doesn't pile up. Many brokerage accounts will allow you to set up an automatic investment plan.
One of the best ways to automate your investments is through a low-cost index fund that tracks a stock market index like the S&P 500. Most brokers will allow you to set up an automatic investment plan for funds you own in your brokerage, retirement, 529 plans, and other accounts. That way, your automatic transfers are immediately invested.
5. Automate dividend reinvestment
If you choose to hold individual stocks, you might want to consider setting up automatic dividend reinvestment. Most brokers allow you to put your dividends on autopilot by automatically reinvesting them to buy more shares of the same stock or fund.
That way, the dividend payments won't pile up in your account, earning little to no interest until you decide what to do with them. Thanks to the power of compounding, automatically reinvesting dividends can significantly boost your returns over time.
Automated investing is a tool that automatically takes the money you want to invest and builds an investment portfolio based on your selected parameters. In other words, it’s about using digital platforms that make pre-programmed investing and trading decisions for you based on the data you enter. Taking into account such variables as age, income, goals and risk tolerance you, the customer, only need to choose how much you want to invest and how often you want to invest your money. This is what it means to set up the parameters of your investment. Afterwards, computer-based algorithms will automatically invest your money. Robo-advisors are a low-cost way to create an investment portfolio. In a few simple steps you, as the customer open an account, fill out a questionnaire, and then deposit cash to invest. In the setup stage, you connect your new investment account to a bank account in order to fund it. Once you complete your questionnaire, the robo- advisor gets to work for you and allocates your cash typically relying on low-cost funds that spread your investments across different assets. The robo-advisor will ultimately use your investment goals from the questionnaire you filled out earlier and create a customized asset allocation model. Once you have set up your account there isn’t much work to do since robo advisors automatically rebalance your investment portfolio periodically based on your risk tolerance, market conditions, and other factors.
There are many ways to invest your money depending on your priorities. One way is to educate yourself through reading articles and watching the stock market to see when it’s a good time to buy or sell your investments all which is done manually. This can be extremely time consuming as well as require extensive knowledge of investments and markets to minimize the risk of losing money. For the average person who is conscientious of their time and energy, but who may also be a novice investor a good option to consider is automated investing through the use of robo advisors. Automated investing doesn’t require much money, time, effort, or knowledge to get started so it is a good place to begin if you want to truly grow your wealth. It saves stress, energy, and effort while allowing your money to go to work for you and at the same time give you a profit that can improve the quality of your life. The world of stocks and bonds can certainly be an overwhelming process which is why automated investing can be a great place to start.
There are other advantages of automated investing. Earlier, people who wanted to invest their money had to pay outrageous fees and very high minimums for professionally managed investment assistance. Now there are low-cost options available to setting up an investment portfolio through the use of robo-advisors and digital platforms. Many of the robo-advisor algorithms rely on Nobel Prize-winning investment theory to guide their models. This means that they strive to create an investment portfolio that can achieve the greatest return with the smallest risk. There is also the possibility to use robo-advisor services combined with a financial advisor which allows the financial advisor to be able to spend more time with you, as their client, addressing individual tax, estate and financial planning issues instead of the time consuming process of choosing which assets to invest in. It’s important to note that there are different kinds of robo-advisors that offer different types of services for a diverse set of clientele whether you are just getting started or are a more experienced investor. There is also a low minimum balance for investors with a small net worth to get robo-advisory management. The bottom line to automated investing is for the investor to determine what kind of guidance they are seeking and then to choose a robo-advisor that suits their individual needs and style.
