How to Invest Your Money For Retirement
How to Invest Your Money For Retirement
The investment world does a good job of making the process seem confusing and overly complex. A mentor of mine once told me that a solid financial plan should be able to be explained on a napkin, and your investment strategy on a sticky note. When you’re investing for retirement, there are many different types of investments to choose from. A financial planner would call these “asset classes," which group similar types of investments. Some common types of asset classes include stocks, bonds, real estate, precious metals (like gold), annuities, cash value life insurance, and alternative investments. Each asset class has roles for which it is best suited. Think of those asset classes like tools in a toolbox; depending on the need, the proper tools are selected to accomplish the job. Most retirement strategies don’t rely on just one of these; they use a mix. That’s called diversification. You’ve probably heard the phrase, “Don’t put your eggs in one basket.” That’s exactly the idea. By spreading your money across different types of investments, you manage risk because they seldom go up or down at the same time. If you are old enough, think back to the 2008 housing market crash when stocks and real estate lost value, but bonds and gold were up. A diversified account that held stocks, bonds and gold would have fared much better than an all-stock allocation.
When you are in your 20s, 30s, or early 40s, retirement strategies tend to be more aggressive and less diversified. Why? Historically, stocks have been reliable, long-term investments that have outpaced inflation. Plus, when you’re younger, you have decades to take advantage of natural temporary declines in stock prices. If you are funding your retirement accounts regularly, the ups and downs work in your favor.
Within 10 to 15 years of your target retirement date, it is often recommended that you begin adding additional, non-correlated, asset classes. Non-correlated means they don’t always move in the same direction at the same time; for example, short term bonds, stocks and gold are fairly non-correlated. For anyone who has a target date fund in their company 401(k), this is what the target date fund is designed to do. Over time, it gradually becomes more conservative by adding bonds to your portfolio with the objective of having a diversified allocation by the time you are ready to retire. You may also begin changing the type of stocks that you own. While growth stocks that don’t pay dividends are great for young investors, value stocks that are typically more stable and pay regular dividends become more attractive as the investor nears retirement. Why? The primary focus of a retirement account in retirement is to provide income and stability. While growth is still important, it becomes a secondary goal.
Not everyone starts saving for retirement in their 20s or 30s and that’s okay. If that is the case, what investment strategy is appropriate? The answer: the one that has the potential to grow to meet your accumulation goals, based on your funding level. If you are unsure what kind of growth rate you need or what strategy makes sense for you, I recommend talking to a financial professional who can guide you.
Need help? Give us a call!
Disclaimer: Crosby Advisory Group, LLC is a registered investment advisor. This newsletter is for general knowledge and is not intended to be individual investment advice. Investing involves risk including potential for loss. Understand all risk and fees before investing. NMD Insurance is affiliated with Crosby Advisory Group, LLC.
