If we have money to invest for our retirement savings, whether through a 401(k) plan at work, in an Individual Retirement Account (IRA), or through taxable savings, we have an almost overwhelming choice of where to put that money. Of course we want the money to grow, but investing in growth entails market risk, and as we get closer to retirement, we can’t afford to take much market risk. So our investment needs evolve as we get older.
Invest in Mutual Funds
Most investors put a substantial percentage of their savings in mutual funds — a basket of stocks, bonds, real estate holdings, cash, or more exotic investment products. Mutual funds are either actively managed, with the managers aiming to beat the market; or they are tied to an index and aim to simply duplicate that index. If you own just a few mutual funds, even just three or four, you can be broadly diversified in the stock and bond markets.
However, out of literally thousands of mutual funds on the market, offered by hundreds of investment companies, you need to find those funds that are most appropriate for your needs. Also, it is important to rebalance your portfolio on a regular basis — perhaps annually — to ensure that the mix of stocks, bonds, and other investments that you have selected remains in proper proportion. And, best intentions aside, many of us simply neglect to rebalance, putting our nest eggs at risk of overexposure to a particular segment of the market.
Invest in Lifecycle Funds
Many large investment houses have sought to simplify the process of saving for retirement by offering “life-cycle funds.” These funds are the closest you can get to putting the process of saving for retirement on autopilot. Life-cycle funds hold a broad range of investments, mostly stock and bond mutual funds, but their special feature is, they adjust automatically on an annual basis as you approach retirement, shifting funds from more risky but higher-growth-potential investments to more conservative funds.
For example, if you plan to retire in 2030 and purchase a life-cycle fund in 2010, the fund may initially hold 50 percent of its assets in an index fund reflecting the broad stock market, 38 percent in a fund representing the broad bond market, 8 percent in a fund holding European stocks, and 4 percent in a fund holding Asian stocks. This mix will gradually, and automatically, rebalance every year; by 2020, it may hold 50 percent in the bond fund, 40 percent in the stock fund, 5 percent in international stocks, and 5 percent in a fund holding Treasury inflation-protected securities (TIPS).
And, a few years before your retirement, the life-cycle fund may hold mostly bonds and other income-generating investments, plus large-company stocks that pay healthy dividends.
Most large investment houses offer a range of life-cycle funds, which you can select depending on your needs and your tolerance for risk. If you are unsure about how much risk you can stomach, talk to a financial advisor.
During the stock market crash of 2008, many life-cycle funds were hit badly, even those that were held by those nearing retirement — whose nest eggs should by then have been held in relatively safe investments. Investment houses offering life-cycle funds then took a close look at these funds, adjusting how they allocated funds. There are no guarantees in investing, but life-cycle funds are now safer than they were. It’s best to purchase these funds through established investment houses that don’t charge sales commissions — T. Rowe Price, Vanguard, and Fidelity, for instance, all offer a range of life-cycle funds, so you’re sure to find one that suits your needs.
An investment calculator can be a wonderful tool if you are contemplating investing but are not sure which scheme will give you the best financial rewards. With so many companies now advertising on the internet, it is easy to gain access to a great many investment opportunities.
Many companies who are available to handle your investments will feature an investment calculator on their website. These are usually easy to use and will give you an idea of what return you can expect if you put your money with them. The calculator is there to help you get a clear picture of what you can expect back after a certain length of time. There are many variables which you can enter into the equation and all of these can be taken into account when calculating the results.