When it comes to saving for retirement, experts recommend saving between 70 and 85% of your yearly pre-retirement income for each year that you will spend in retirement to maintain the standard of living to which you are accustomed. If you plan to live on cash savings alone during retirement, you might find your retirement goals difficult to reach. Another way to prepare for retirement is to continue to save as much as you can, but also take a little risk with some of those savings.
Investing your hard-earned money may feel intimidating. There is always the chance that the market could perform poorly, and you could lose money. The opposite is also true. To reduce the risk that you assume when you invest for retirement, here are a few strategies that can help.
Discover some helpful tips and considerations for your retirement. Read Retirement Basics.
Diversification
When it comes to setting yourself up for success in retirement, diversification is important. Diversification can be used to reduce both inflationary risks (the risk that the price of goods and services could outpace the rate of return your investments earn) and business risk (the risk that a company will not earn profits or fail entirely). This involves investing money in several different investments as opposed to a single investment (e.g., investing in stocks X, Y, and Z instead of only stock X). The idea is that when some investments do not perform well, those poor returns will be offset by other investments that do. If you’re not comfortable investing in individual companies’ stocks, buying into mutual funds or index funds, composed of a broad portfolio of companies from different economic sectors, is one way to diversify your retirement savings.
Asset Allocation
Asset allocation helps mitigate multiple types of risk by diversifying a portfolio among several different asset classes – meaning various types of investments, such as stocks, bonds, CDs, annuities, real estate, etc. Different asset classes inherently have differing levels of risk and volatility. Stocks are subject to market fluctuations without any downside protections. Therefore, they are considered particularly risky. CDs are considered safer investments, but they are susceptible to inflation risk. One common asset allocation strategy is to consider safer investments, such as bond ladders or guaranteed rate deferred annuities, as you get closer to your retirement. This approach decreases your exposure to market volatility and interest rate risk to help protect your nest egg.
Navy Mutual only offers fixed annuities, so you can rest assured your principal and interest earnings are guaranteed! There are liquidity considerations when it comes to guaranteed rate annuities, so check out Annuities: The Unsung Heroes of Retirement Planning to learn more.
Dollar-Cost Averaging
Dollar-cost averaging is a technique used to reduce market risk, but (as with all risk management techniques), it does not guarantee that you will see a return on investments or that you will be protected from loss in declining markets. It involves regularly contributing a set amount to a stock or bond mutual fund instead of saving a lump sum outside of the market and then making your investment purchases all at one time. This strategy results in the fixed dollar amount of contributions purchasing more shares of the investment when the price is lower and fewer shares when the price is higher, and may result in an average cost per share that is lower than the average resale price over time. Dollar-cost averaging works to reduce the impact of a volatile market by spreading out your purchases at different price points, rather than attempting to time entry points, which often results in less success.
Modern Portfolio Theory
Many investment strategies are based on Modern Portfolio Theory. This is a term used to describe a body of knowledge developed in the 1950’s. It is used by investment companies that manage large institutional funds to create optimal investment portfolios that reduce risk while enhancing returns. Essentially, a computer program “runs the numbers” and alerts investment managers as to whether returns are appropriate for a given amount of risk exposure. This helps them construct a portfolio that will maximize returns given a certain level of risk – or one that minimizes risk for an expected level of returns.
However you decide to save for retirement, it’s important to note that you cannot avoid risk completely. The strategy or strategies you should use depend on your overall asset level, age, time horizons, and risk tolerance. Since there are always going to be daily, monthly, and yearly ups and downs in the market, doing what you can to invest prudently should help you enjoy your retirement. The ideal time to plan for retirement was yesterday, but the next best time is now.
Interested in learning more about how a guaranteed rate annuity might complement your retirement portfolio? You can request more information here.
Note: Navy Mutual annuities are non-qualified annuities, meaning that they must be purchased with after-tax dollars that are not contained within a retirement account. Not available in New York. Interest rates are based on Navy Mutual’s current rate schedule. Rates may change without notice. For current rates, please call (571) 481-2313.