Knowledge is power, and this certainly holds true for retirement planning: the process of determining income and lifestyle goals and the actions you must take to achieve those goals. While retirement planning involves much more than finances – things such as when you will retire, where you will live, and what you will do – most of these factors depend largely on the income you can expect during your retirement years. The more you learn about and understand the various investment options, the better equipped you may be to make effective decisions.
Because of the power of compounding, the earlier you start saving for retirement – through stocks, employer-sponsored plans, mutual funds or a large variety of other investments – the longer your money can work for you, and the more money you might be able to save for the future. In general, younger people are able to take on more risk: they have more years to recover from any losses. Older people, on the other hand, tend to be more conservative in their investments. This can be a bit of a Catch-22: since older investors tend to limit risk, the investments frequently have lower earnings potential. Starting early is one of the best ways to ensure you will have enough money to live comfortably during retirement. That said, it is “never too late” to start saving for retirement, and every little bit helps.
The investments you choose for retirement may change over time in response to your goals, risk tolerance and investment horizon. Asset allocation – or how you apportion the various investments in your portfolio – is viewed by many as more important than the actual securities chosen for the portfolio. The three main asset classes include stocks (equities), bonds (fixed income), and cash and cash equivalents, and each has different levels of risk and return. Finding the balance that is most appropriate for your situation takes time and effort. Here, we provide an introduction to popular investments that may be considered when planning for retirement.