The goal of most Americans is to retire comfortably, and on their own terms. Of course, getting to the point of actually putting their retirement plan into action is likely the most difficult part of retirement. Let's face it, Americans' will to save and actually exercise discipline when it comes to their finances isn't always top-notch.
However, what an investor does when they do have money saved up for retirement can be just as important as how they'll continue to save money. There are arguably dozens of different investment options available to the average American -- so how do you choose?
Though each scenario is different, all investment option choices come down to two factors: risk tolerance and time. If you're a young adult, you likely have the time for investments to mature and are probably willing to take on more risk. For pre-retirees, time isn't as much of an ally, and capital preservation becomes a bit more important. Regardless of which camp you fall into, there are always solid investment options available if you're willing to devote the time to becoming an "in the know" investor.
Today, we'll take a look at five great investment options you can consider with as little as $2,000 (although this figure is fluid depending upon your investment option or ability to save).
No. 1: Open a Roth IRA
Arguably, one of the greatest investment options open to Americans (as long as they meet certain income limits) is the Roth IRA.
Individual retirement accounts come in two primary forms: the Traditional IRA and the Roth IRA. Traditional IRAs will give you an upfront tax deduction on the amount you contribute ($5,500 max. contribution for those aged 49 an under in 2015, with a $1,000 catch-up bonus for those aged 50 and older), but you'll need to pay taxes on the money you've earned when you begin taking mandatory distributions by no later than age 70 1/2.
A Roth IRA has no upfront tax benefit, but the back-end benefit is incredible. With a Roth IRA the account owner will owe nothing in capital gains taxes as long as he or she doesn't make any unqualified withdrawals. Furthermore, there is no regulation requiring a distribution by age 70 1/2, meaning an account holder can choose to continue letting time and the principle of compounding work their magic.
I'd encourage anyone with extra savings lying around to consider maximizing their Roth IRA contribution annually.
No. 2: Go back to school
How about investing in yourself? If you've got $2,000 lying around perhaps it's time you considered going back to school to learn a specialized skill or to improve your knowledge in a particular subject.
According to the Pew Research Center in Feb. 2014, a millennial aged 25 to 32 with a high school diploma that worked full-time earned a median of $28,000 annually. By comparison, this same age-range millennial with a bachelor's degree or more earned a median of $45,500 per year. Nominally that's a $700,000 difference over 40 years, but inclusive of investments we could be looking at a multi-million dollar gap in earnings all because one person had a college education and the other didn't.
Do yourself a favor and invest in what is your most lucrative asset: you!
No. 3: Start a 529 plan for your children
Sending your kids to college is expensive ... like crazy expensive! The National Center for Education Statistics shows that the average cost of a college tuition at a four-year institution is $29,408. Private colleges are even higher with a typical cost of $44,750. College costs, per Mother Jones, are up more than 1,100% since 1978, so it's no wonder that student loan debt has recently surpassed the $1.2 trillion mark.
The smart solution, and one of your best investment options could be to start a 529 plan for your kids. A 529 plan is an education savings plan that works a lot like an IRA in that you can invest in various types of assets to grow your money over the long run. What's great about a 529 plan is you can make withdrawals from the plan for specific educational purposes and have no tax liability on capital gains from the federal government. Some states may even offer an upfront deduction or some form of income exemption, though you'll have to check with your states' regulations to be certain. As a quick reminder, there is no upfront tax benefit when contributing to a 529 plan.
No. 4: Open a stock investment account
Among your investment options, opening a personal stock investment account is another potentially smart move.
Although the stock market is prone to an occasional "hiccup" or two from time to time, it has been shown to be one of the most consistent generators of wealth over the long-term, and has regularly crushed investments like bank CDs or money market accounts. Over the long run the stock market has returned about 8% annually, meaning the average investor can aim to double their invested money about once per decade over their lifetime.
Not sure where to get started? If you're a novice investor or just petrified of risk, consider investing in electronic-traded funds, or ETFs. An ETF is nothing more than a basket of stocks that represents a sector or index, giving you incredible diversity for what can be a minimal investment amount. For more experienced investors, $2,000 can be spread among a handful of stocks or even invested in one company if your plan is to add money to your investment account with regularity.
No. 5: Consider corporate bonds
Finally, for those of you looking for a steadier return on your investment with a good chance of capital preservation, consider purchasing corporate bonds.
U.S. Treasuries are always an investment option here as well, but they typically carry a lower yield because of their unparalleled safety of being backed by the U.S. government. Instead, corporate bonds are usually going to offer an inflation-topping coupon rate that's bound to make income-seeking investors smile (although the risk of default is a bit higher).
Within the scope of the U.S. stock market there are now just three AAA-rated companies. The AAA-rating implies credit agencies' utmost confidence that a corporate entity will be able to meet their debt obligations. One such company is healthcare conglomerate Johnson & Johnson (NYSE:JNJ), which has grown its adjusted EPS in 31 straight years and boosted its annual dividend for 53 consecutive years. Many of Johnson & Johnson's bonds are set to mature within the next 10 years, with some of its longest-term bonds offering yield's to maturity of approximately 4%. Currently that's double the rate of inflation.
The point is you don't have to be overwhelmed by a sea of potential investment options as long as you're willing to take the time to figure out what goals matter most to you. The next move is up to you.