8 Ways You Can Effectively Invest for Retirement
By John Spoto
Investing your savings to achieve your retirement goals may seem like a daunting task. It doesn’t have to be. A well-designed portfolio is an important element for achieving a secure retirement. Although this portfolio will be different for each of you depending upon your individual circumstances, here are the fundamentals for developing an effective investment plan:
* Be realistic. We can’t predict the future, so no one knows today what the ideal portfolio should be. We can however, construct a sensible one that increases the chances of reaching your goals.
* Identify the objectives for the portfolio. What do you want it to accomplish before retirement, during retirement and after you are gone? In addition to supporting your retirement expenses, are you planning to leave assets to family members or a charity? If so, how much do you want to leave?
* Understand your risk profile. Your emotional and financial ability to accept short-term losses in exchange for expected, but uncertain, longer-term gains needs to be determined before you make your investments. If you can’t sleep at night fearing a severe market drop or if a prolonged downturn will derail your chances of retiring when you want, a portfolio heavily tilted toward stocks may not be right for you.
* Establish your asset allocation. The most important investment decision you will make is determining the portion of your investable assets you want in the three major asset classes of stocks, bonds, and cash. This one decision will determine the majority of your portfolio’s performance.
* Diversify through sub-asset and security selection. There are different categories of stocks (e.g. large company, small company, international, etc,) and bonds (corporate, government, municipal, etc.). Selecting the appropriate mix of categories and funds will enable you to further reduce the unnecessary risk in your portfolio.
* Determine your asset location. Different types of accounts, assets, and earnings are taxed differently. Placing the appropriate investments in the right accounts will improve your after-tax returns without increasing your risk.
* Rebalance periodically. Asset classes perform differently during the year. In order to maintain your desired asset allocation and manage your investment risk, rebalance your portfolio periodically.
* Minimize costs. Investment expenses reduce your returns, dollar for dollar and will cost you dearly over your lifetime. Avoid funds that impose sales commissions or high annual fees.
The bottom line: Building a well-thought-out investment plan will increase your chances of enjoying a comfortable retirement.
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.
John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com .