The most important financial goal is saving for retirement. Unfortunately, no one is going to hand over a hefty bag of cash when you stop working. You can't get a loan or scholarship to pay for your living expenses in your golden years. So it's all up to you. Here are a few things to consider as you're saving and investing for retirement:
1. Don't take too much risk. Most people who have achieved financial critical mass—that is, they have enough money for retirement—save small amounts of money over a long period of time. In the accumulative, or working, stage of life, you can afford to take risks in the markets to earn higher returns. If you make a financial mistake, you can fix it by getting another job or a loan, and you have time on your side. When you're retired, though, you can't afford to make mistakes. As you approach retirement, you need to cycle down risk by lowering your exposure to stocks. Bond funds, balanced funds, and other conservative investments can help reduce risk in your portfolio. It may mean missing some gains, but it's the right thing to do.
2. Don't be too conservative. Some people don't take enough risk. They say, "I'm retired so I'll put all of my money in the bank, where it will be safe." The challenge is that people are living longer and it's going to cost more to buy essential things during retirement years. While it's better to protect your portfolio from downturns in the market, it's still okay to have some exposure to stocks—that's what keeps you ahead of inflation. If you don't have growth investments, your portfolio might not accumulate the amount of money needed each year during retirement.
3. Hire an adviser. It's worth hiring a investment advisor to plan for retirement. It amazes me that people will pay someone to do their taxes and mow their lawn, but they won't shell out the money for a professional adviser to set up accounts and pick the appropriate investments for their financial goals. Retirement is a major life-cycle event, so professional planning is worth every penny. If you mess it up, the repercussions are pretty serious.
4. Don't tinker too much. Some investors, especially those who like to watch daily market moves, feel like they have to tinker with their investments. Don't make any moves just because a stock you own or sector takes a hit one day. Think of it this way: If your car is running fine, would you start unscrewing parts under the hood until the engine starts to make a strange noise? No. You should review your portfolio two to four times a year, and make changes only when necessary. Usually, rebalancing involves realigning your holdings slightly to your allocation objectives. Don't make too many changes and stick with your plan.
5. Needs are different in retirement. Psychologically, we form who we are as investors when we're working and accumulating money. Once you get to retirement, your investing needs are different. You still need your money to grow, but you also need to have that predictable income on a monthly basis. When you retire, your income stops but your expenses don't. Sometimes, retirees will have to sell a holding when it's down—which is the worst time to unload—because they have to raise money to pay for living expenses. To help bridge the gap between income and expenses, we recommend a combination of growth investments and investments that protect monthly income. As the market goes up, retirees can selectively harvest gains in the growth portion of their portfolio (stocks), and move the money to the income portion (bonds). This can be done during the usual review of your portfolio a few times a year. We have found this strategy keeps risk low and allows retirees to continue accumulating money to pay for expenses and other needs.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast-to-coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April, 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC registered investment adviser which provides mutual fund and asset allocation recommendations and research to stores in The Mutual Fund Store system.