Many things have changed over the last 50 years, but at least one thing hasn’t: We all still want a carefree retirement. You will have a much better chance of attaining a secure retirement if you make appropriate investments. Here are five time-tested investment rules that will help you prepare for retirement.
1. Investing isn’t all about returns. People invest to satisfy a combination of three needs: Shorter-term liquidity needs, longer-term income needs, and security blanket needs. Not everyone needs to have the same amount allocated to each of these needs. You might need 10 percent of your money for short-term liquidity while your neighbor needs 40 percent. Likewise, you might need 25 percent of your money invested in FDIC insured accounts to provide for a sense of security, while your sister might only need 10 percent. Instead of worrying about finding the best performing mutual funds or the best checking accounts, get a clear idea of how much you need in each of these three buckets first. Then look for the best investments within those buckets.
2. Understand your time frame. When you make your investment decisions, be dispassionate and pay attention to your time frame. When you have a long investment time frame, it doesn’t matter what happens over the short-term. But investors often make decisions to avoid short-term volatility when they should be doing just the opposite. For example, if you are 65 and want to invest to create income, you probably want that income to last for the rest of your life. Healthy individuals in their 60s should probably make investment decisions with at least a 20-year time frame in mind. When you’re looking for long-term income you need to make long-term investments.
3. Safeguard your nest egg from your children. We all want to help our children, but be careful when supporting adult children financially. When they come to you for a business loan, think it over carefully. Many children don’t repay loans when they have borrowed money from their parents. If you can afford to give your children a financial gift, that’s certainly a wonderful way to help them. But if you can’t afford to give that money away, think twice before you make a loan to your children.
4. Budget tracking is a necessity. Tracking what you spend is crucial to your financial future. While your income may be fixed, your spending isn’t. If you track your spending and you keep it reasonable, you won’t be forced into making risky investments that promise high returns. You simply won’t need to take high risk. In addition, you’ll be better able to stay out of debt and keep a good credit score by implementing budget tracking.
5. Think about your team. Even if you make your own investment decisions now, you may not always be able to do so. And if you’re not around, your spouse may need someone to take over. Baseball teams hire relief pitchers before they need them, just in case. You need a relief pitcher too. Either groom someone in your family or find a professional to rely on. Find someone before you need them, because by the time you have a need it will be too late.
Neal Frankle is a certified financial planner and runs Wealth Pilgrim, a personal finance blog that helps people make smart decisions about their money. As a start, he suggests that you strive to understand your credit score range.