“If your retirement plan is to be financially secure and you don’t have generous pension income coming to you, you’ll probably want to learn how to invest,” writes Selena Maranjian for Motley Fool. Yet, most people are also aware that the older they get, the more they need to keep their retirement savings safe. So, over time, the typical person will gradually lessen the percentage they have invested in stocks and shift funds to bonds. This is because while stocks have the greatest potential for growth, they also hold a lot of risk. Therefore, while the returns on stocks will give you the best chance to beat inflation over time, it makes sense to accept less risk as a person moves toward retirement.
What are stocks? They are financial instruments issued by large corporations as a way to raise capital. When you hold shares of a company, you essentially own a right to a portion of that company’s future profits. However, the price of stocks do change continually, and sometimes there is a considerable amount of volatility. Nevertheless, the aggregate long-term returns from large corporations are roughly between 9 and 10 percent. Why aggregate? This is because different investors have vastly different experiences based on their individual investments.
Regardless, the ultimate question becomes, “Should investors assume more risk?” Typically, many investors will make use of a “three-bucket” strategy. Depending on their age, they will have their retirement savings spread across stocks, bonds, and cash. Since people are living longer, fear of risk could risk your future. For example, in the past, if you were 70 years old, you could have 30 percent in stock, and the remaining in bonds with enough cash to cover your annual expenses. Today, a better target may be to have 40 or even 50 percent invested in stocks.
Ultimately, if a person crowds around low-risk investments that cannot grow, there is a potential for running out of money. Therefore, the typical person will need sufficient equities to maintain their income for life. All that said, even if you consult a financial advisor, it is essential to learn all the complexities and risks of your investments, not just completely rely on the advice of someone else.
To talk about the advantages of stocks for retirement, or a related topic, contact a financial planner in your area.