A retirement plan, such as a 401(k) or an IRA, can include a wide range of assets, such as stocks, bonds and cash investments. Everyone has different goals and circumstances. You need to choose an asset mix that’s appropriate for you.
Define Your Goals
Before you start planning, get clear about your goals. “Having a secure retirement” is a good place to start, but it’s vague. Think about the type of lifestyle you want and how much it will cost.
Consider how much money you’ll need for housing, food, healthcare and other necessities, taking inflation into account. If you want to travel, factor that into your calculations. You don’t need to have everything figured out right now, but the more specific you are, the easier it will be to create a plan that will work for you.
Think About Your Time Horizon and Life Expectancy
Knowing approximately when you want to retire is critical. The number of years between now and your retirement date will affect the types of assets you’ll choose and how much you’ll have to contribute to your retirement plan each month.
Think about how long your money will have to last. Consider the average life expectancy for a person of your age and gender and take your own health and other personal circumstances into consideration.
Factor in All Sources of Income
You might have several sources of funds that you plan to use to cover your living expenses when you’re retired. Think about how much you will get from Social Security, a pension or another source, such as rental income. Money that you can reasonably expect to receive from other sources will influence the amount you’ll have to save in your retirement account.
Choose the Investments That Are Right for You
The ratios of stocks and bonds in your portfolio will reflect your goals and will change over time. If you don’t plan to retire for a decade or more, you’ll probably want most of your portfolio to consist of stocks. Although the stock market can fluctuate wildly in the short term, it tends to go up over long periods of time.
As you get closer to your target retirement date, your risk tolerance will decrease. You’ll want to be sure that the money you need will be there when you need it, so you’ll want your portfolio to include a larger percentage of more secure investments, such as bonds and a smaller percentage of stocks.
It’s in your best interest to have a diversified portfolio that contains a mix of different types of assets and that represents numerous companies in multiple sectors. Some assets will perform better than others. Diversification can shield you from major losses.
Consult a Financial Planner
This information is only intended to serve as general advice. A financial planner can discuss your individual goals and provide recommendations that are tailored to you.
