Planning for Retirement

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Are you retiring next year, within the next few years, a decade from now, or 30 years from now? Exactly when you plan on needing the money you have invested is a major factor of your investment strategy. A person who is 30, or more, years away from retirement is usually capable of accepting more risk in their investment strategy and therefore a higher potential gain in their investment portfolio may be realized than a person who is 5 years away from retirement and may be more concerned about the security of their investment portfolio.

There is a simple guideline that says the percentage of stocks that you should have in your portfolio is 100 minus your age. According to this guideline, a 60 year old person should have 40% of their portfolio invested in stocks. This is only a suggestion, not a rule of economics or an investment principle. It’s a tool that allows you to identify a general correlation of your age to the risk you might assume. Guidelines and decision-making tools are valuable, but not as valuable as your knowledge of the various investment types to provide what you consider to be an acceptable return on your investment.

Investment Types for Your Retirement

Everyone is not the same and one person may be much more accepting of risk in their investment portfolio than another regardless of their age. While stocks, bonds, and some sort of highly liquid cash instrument are included in virtually every investor’s portfolio; other types may require a higher ability to accept risk.

*Stock certificates are usually best for investors with a long-term approach in their retirement strategy. It is generally assumed that an investor needs to be willing to hold stocks for 10, or more, years. Some people feel that a person should always have some stocks in their portfolio to provide growth potential. Only you can decide your willingness to accept the fluctuations in the stock market and watching your investment occasionally lose money. Historically, stocks have returned about 10% per year.

*Bonds are issued by a variety of entities. The risk with this investment is directly related to the entity’s ability to repay your original investment amount. Obviously, the entity’s liquidity and future performance become major factors in deciding which bond option to choose. Unlike stocks, bonds guarantee a return on your original investment, often on a regular basis. Bond return on investment is usually limited to about 7% per year.

*CD’s, or Certificates of Deposit, are a relatively low-risk investment. CD’s offer a higher rate than most savings accounts, but they come with the same federal deposit insurance protection as a savings account. They can be purchased at different maturity intervals to create a redemption schedule that fits your income needs.

*Annuities are usually a reasonable investment if you have extra money to invest and have already reached your maximum investment for your IRA or similar retirement account. An annuity is an investment with an insurance company and for that reason the rating of the insurance company is a highly important matter.

*Commodities are one of the biggest combinations of risks that exist in the market. Grains such as wheat, coffee, gold, and petroleum are just a few examples of commonly traded commodities. Commodities require a high tolerance to risk because they can be subject to variables such as political changes and weather, neither of which can be easily anticipated by the average investor. Trading in commodities is a relatively short-term investment despite the fact that “futures” are what the primary investment strategy is all about.

*Trading currencies requires a high tolerance to risk, but you can invest in foreign currencies simply by buying foreign bonds. The problem with trading foreign currencies is that the activity isn’t expected to provide a return on your investment over the long haul of a retirement portfolio. But bonds are bonds and they come with reasonable expectations of a return regardless of the currency backing the bond.

*Investments such as providing venture capital can be a powerful addition to a retirement portfolio, but only if your liability and exposure to risk is well managed and can be tolerated. Venture capital may be assumed to be an investment on which you may never see a return just like any other stock investment. But a thorough knowledge of the particular company’s product and some active participation on the part of an investor will reduce potential risk. Venture capitalists usually have both a higher than average net worth and resistance to risk.

*Real estate investments can provide a regular retirement cash flow if the property is rented, or act as an investment buffer in case the property needs to be sold to pay for an unexpected event in your life. While you would be responsible for capital gains on the sale, your other investments would be secure. At least you would have a choice of what asset(s) you would like to liquidate.

Regardless of your age, planning for retirement requires research, a personal analysis of your ability to accept risk, and a personal involvement in investment decisions that will affect your quality of life during your retirement years.

Visit us to get more information about Matt Bruderman of Bruderman Brothers.

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