When you’re preparing for retirement, you want to be sure that you’re investing in the proper accounts. There are a lot of factors to consider during your working years, as you make your investment decisions. Here are 5 things to consider as you choose investments to prepare for retirement.
Risk Tolerance and Investment Goals
When you’re working and saving towards a comfortable retirement, it’s important to think about your particular level of risk tolerance. How much money are you willing to possibly lose? This should change over the years, as your time horizon grows shorter. When you have a long time horizon of a decade or two decades or more, you can afford to take greater risks. But as your target retirement date grows closer, you’ll want to ease up on the high-risk investments.
Consider your investment goals along the way. The more audacious your goals are for retirement income, the more risk you may be willing to take on. But you also do need to take on some risks in order to see good gains in your investment portfolio.
Diversify Your Investments
No matter where you are in your retirement journey, a common guideline is to diversify your investments. You don’t want to “put all your eggs in one basket” or put all of your investments into a single stock or fund.
When you build a diverse investment portfolio, your risk of destroying your retirement goals goes way down. If you have some of your money invested into a work-sponsored 401(k) or 403(b), plus some money invested in IRAs, and maybe a bit in some real estate, you’ve spread out your risks among different investments.
Estimate Your Retirement Expenses
While it’s not possible to get an exact figure of expenses during retirement, you should be able to examine your pre-retirement spending and estimate your income needs fairly accurately.
Figure out what expenses will likely be fixed, which will increase, and which will decrease in retirement. For example, health insurance and medical expenses may increase a great deal. Many retirees spend more on entertainment, dining out, and travel because they have more leisure time to fill than during their working years.
However, some costs should decrease during retirement. If you pay off your home while you’re working, that lack of mortgage will significantly decrease your expenses. In general, it’s a good idea to overestimate your expenses rather than underestimate.
Another factor to consider in your retirement expenses is the tax rate you’ll pay on your income. Many of your investment withdrawals will be taxed, so be sure to include that tax in your estimate.
One aspect of your retirement you might not think about much is estate planning. Usually, you focus on investments and how they’ll help you to have a good retirement. However, it’s good to consider what will happen to your retirement accounts after you’re gone.
Take some time to examine how you want your investments to be distributed in the event of your passing away. Put a legal will in place, delineating who will receive your hard-earned funds and other assets. Too many people die without having the proper paperwork in place to ensure their wishes will be carried out. When you go to the trouble of making sound investments for decades, don’t forget estate planning to protect those investments for your loved ones.
Examine Your Investment Fees
Fees on investments can vary a great deal depending on the type of investments and the type of management. You may use an investment advisor that charges a fee based on a percentage of the total assets managed. Some brokerage accounts and mutual fund accounts may charge annual fees. You also may be facing transaction fees when buying or selling particular stocks.
Don’t blindly stick with the advisor or the investment strategy you started with in your twenties. You should continue asking questions and know the actual fees you’re responsible for, so you can determine whether those fees are necessary. Pay attention to the fees you pay for investments, so you don’t lose out on a lot of money when you retire.