When you’re looking to save a nest egg for retirement, you need to make sure that you manage your investment risk carefully. On the one hand, you want to try to maximize your returns down the road, yet on the other hand, you need to make sure that your investments aren’t going to leave you broke when you’re too old to work anymore. It’s certainly a tricky balancing act.
Setting aside savings from your salary is undoubtedly tricky, so your best plan for retirement is to earn high returns on savings without acquiring too many stocks and watching the stock market frantically like a panicked hawk. However, once you’ve actually retired, at least for most people, the plan is to maintain the savings for as long as possible, rather than keep growing them further.
When you’re younger, you can afford to take more risks with your portfolio because you most likely have income coming in from a salary. Although in your retirement you may have some sort of pension income, it’s not likely to be as much as a salary, and as a result you need to consider investing in very safe portfolios. Stability and predictability are your best bet as you retire, and if you’re going to opt for some risky investments, you’d better make sure you have a diverse range of safe investments in order to back it up.
Some personality types may not be too worried about investment risk, finding it exciting or interesting. Most of us, however, want to be secure and know that we won’t end up on the streets if the stock market suddenly crashes overnight.
The Warren Buffett Retirement Portfolio
The Warren Buffett Retirement Portfolio is a common investment strategy for retirees which suggests that you invest 90% of your savings into a Standard & Poor’s 500 index fund and the last 10% into government bonds which are short-term. However, this is quite misguided, as a 9/1 ratio of stocks and bonds could see a retiree running out of money over the long term, especially if they maintain their health for many years to come.
On the other hand, if you do opt for a very safe investment approach, you still have to consider how you’re going to make it work. Even if you’re going for a very safe approach, we cannot always predict how the markets will behave, and it can nonetheless be difficult to ascertain and predict your returns. Ultimately, your stocks/bonds ratio could end up being more volatile than you imagined, leaving you with a degree of uncertainty about your investments and their returns.
The T Rowe Price Retirement Income Calculator
Nonetheless, perhaps you should use a tool such as the T Rowe Price Retirement Income Calculator, which will help you to calculate the mix of stocks and bonds that are able to support and help you with varying levels of withdrawals throughout your golden years. Using the calculator, you should be able to determine the stocks/bonds mix which is best for you and your future, leaving you with an acceptable level of risk. Put simply, you need to be able to weather the storm should things go awry on the markets.
Limiting yourself to a reasonable withdrawal rate, for example 3% or 4% initially, allowing room for inflation, you should be able to allocate a diverse range of stocks/bonds which help you to maintain a nest egg for a good 30 years or so. Of course there’s always the fear of running through your savings too soon, especially when you have little income coming your way, but by being savvy, calculating your risks, diversifying your portfolio, and using calculators such as this to help you out, you should be able to prepare your retirement funds effectively.
The bottom line
When coming up with your retirement investment plan, you need to be incredibly flexible. For example, perhaps it may be a good idea to invest more heavily in stocks while still carrying an acceptable level of risk. Or you may for example decide to use a portion of your savings on an immediate or longevity annuity, guaranteeing yourself a form of income in addition to Social Security, thereby giving yourself a safety net if things go awry with the markets… as they often do.
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