{"id":52336,"date":"2021-10-21T07:23:00","date_gmt":"2021-10-21T11:23:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=52336"},"modified":"2021-10-26T09:41:11","modified_gmt":"2021-10-26T13:41:11","slug":"how-to-invest-for-retirement","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/how-to-invest-for-retirement\/","title":{"rendered":"How to Invest for Retirement: Spread Your Risk"},"content":{"rendered":"\n

How many years do you have left until you hope to retire? Considering your age and the time you have until retirement, how would you balance your investment portfolio?<\/p>\n\n\n\n

According to David Bach, the author of The Automatic Millionaire<\/em>, the key factors to consider when it comes to investing for retirement are how long you intend to invest your money for and how aggressively you want to invest. The younger you are, the more you can afford to take risks with your money because you have more time on your side.<\/p>\n\n\n\n

In this article, we\u2019ll explain how to invest for retirement for optimum return\/safety ratio.<\/p>\n\n\n\n\n\n\n\n

How to Diversify Your Retirement Investments<\/strong><\/h2>\n\n\n\n

To ensure that you get the best return from your retirement plan, you need to diversify your investments\u2014this means that you need to invest your money in a combination of cash, bonds, and stocks. The more diversified your investments, the safer your money<\/strong>\u2014stocks may lose their value, but if your money is diversified, the overall value of your plan will stay consistent. However, the safer your investments, the less likely you are to make money on your plan.<\/p>\n\n\n\n

What Does It Mean for an Investment to Be \u201cSafe\u201d?<\/strong>

Bach explains that you need to diversify your investments to ensure that your money is safe, but he doesn\u2019t elaborate on why some investment options are \u201csafer\u201d than others. We\u2019ll therefore explain the difference between \u201csafe\u201d and \u201caggressive\u201d investments:\u00a0

Safer investments<\/strong> (cash and bonds) make less money because they are based on short-term investments with minimal risk. They are less risky because the value of cash and bonds don\u2019t change according to the whims of the stock market\u2014their value remains stable.

Growth investments<\/strong> (stocks equate to a share of ownership in a company) create more money but are also susceptible to income fluctuations that impact the value of your investment. A company\u2019s value fluctuates according to how well it\u2019s performing and the economy in general. Therefore, stocks are ranked by how safe they are, or in other words, how likely the company is to grow in value.\u00a0

The riskier the investment, the more aggressive it is<\/strong>. For example, an investment in an established company such as Netflix is classed as a growth investment<\/em> because the company is expected to continue to perform well. However, if you invest in an unknown start-up based on the assumption that it will eventually become as valuable as Google, this is classed as an aggressive growth investment<\/em>: If your prediction is right, your shares in the company will be worth a lot more than what you initially invested. But, if the company fails, your investment will lose value.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

How to Change Your Diversification Strategy Over Time<\/strong><\/h3>\n\n\n\n

Further, Bach argues that your diversification strategy needs to change over time to reflect your age and your income goals. The closer you get to retirement age, the more you need to play it safe and protect your money.<\/p>\n\n\n\n

The table below illustrates the recommended balance for each age group to invest their retirement money.<\/p>\n\n\n\n

Order of Risk<\/strong><\/td>Your Age and How Much to Invest in Each Option<\/strong><\/td><\/tr>
(Safest first)<\/td>Under 30<\/strong><\/td>30-50<\/strong><\/td>50-60<\/strong><\/td>60 Plus<\/strong><\/td><\/tr>
Cash<\/strong><\/td>5-10%<\/td>5-10%<\/td>5-10%<\/td>10-15%<\/td><\/tr>
Bonds<\/strong><\/td>5-15%<\/td>15-25%<\/td>20-30%<\/td>25-35%<\/td><\/tr>
Growth & Income Investments<\/strong><\/td>30-40%<\/td>35-45%<\/td>30-40%<\/td>30-40%<\/td><\/tr>
Growth<\/strong><\/td>40-50%<\/td>25-35%<\/td>15-25%<\/td>10-20%<\/td><\/tr>
Aggressive Growth Investments<\/strong><\/td>5-10%<\/td>5-10%<\/td>0-5%<\/td>0-5%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

How to Manage Your Investments<\/strong><\/h3>\n\n\n\n

If you don\u2019t feel comfortable managing these combinations, Bach suggests that you invest in mutual funds or exchange-traded mutual funds (ETFs) as they automatically manage and diversify your money for you based on your requirements (how much risk you\u2019re willing to take). They\u2019re also easy to use. Alternatively, employee and individual retirement plans offer \u201casset allocation funds\u201d or \u201cbalanced funds\u201d\u2014these funds also manage your combinations for you.<\/p>\n\n\n\n

In addition, many employee and individual retirement plans manage these diversified combinations for you based on your age and the date you expect to retire\u2014they are commonly referred to as \u201ctargeted-date funds<\/strong>\u201d. These plans automatically balance your investments to reduce risks the closer you get to retirement age. The main difference with these plans is how they continue to be managed once you reach your retirement date. There are two options:<\/p>\n\n\n\n