You know you want to enjoy a healthy, happy retirement. You’ve got a 401(k) or IRA, or some other type of retirement plan, and all you need to decide is which investments are best for your portfolio. Maybe your retirement account has been open for years, but it hasn’t performed the way you’d like. Or perhaps you’re just starting out. So how do you select solid retirement investments?
Time Horizon & Risk Tolerance
According to the SEC, there are two primary factors that influence the selection of retirement investments: time horizon and risk tolerance. These factors go hand in hand, and unless you understand them, you’ll probably make mistakes.
Time horizon is the number of years left before you retire. Young professionals in their 20s have a longer time horizon than established professionals in their 50s. Risk tolerance, on the other hand, is the level of risk you are willing to accept in order to achieve high returns. Aggressive investors have a high risk tolerance.
Generally speaking, your risk tolerance decreases along with your time horizon. As you get closer to retirement, you grow more conservative in your retirement investments because there is less time to make up for losses in the market.
Retirement Plan Options
One of the toughest aspects of selecting retirement investments is that retirement plans are all different. Your options can change depending on your employer, assuming you’re investing in a 401(k). You might have more room to play if you have a Roth IRA, but again you are limited by what your plan provides.
An increasing number of investors are turning to target-date retirement funds, which are convenient for those who don’t want to adjust their choices every couple years. A target-date retirement fund is managed in such a way that it adjusts for your specific time horizon. However, there is less flexibility.
Stocks and bonds are obvious choices for retirement investments, but diversification is key. When choosing asset allocation, it is important to maintain conservative, low-yield investments even if you have chosen more aggressive options as well. As you get closer to retirement, it is important to avoid junk bonds and other insecure investments that could topple your savings down the line.
I have always been a conservative investor, probably because my Dad lost significant savings through stock investments. Most of my money is in money market accounts, CDs, and savings accounts. I know I’ll never get rich this way, but I also know I won’t lose my shirt when the economy takes a dive.
Cash and cash equivalents are more popular as investors get older. They are tired of riding the waves of riskier investments, and they prefer less volatile markets. This is completely understandable. But also remember that there are both good and bad choices in cash investments.
Look for high rates of return in any cash deposit account. Survey numerous options to get an idea of where your money will do the most good. And remember that, the longer the investment, the better the return.
Retirement investments are personal decisions, but work with someone you trust to make the right choices. Do your research and understand the investments in which you place your money. And, most important, make sure to diversify so that your growth and losses are kept reasonably stable between now and retirement.