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A Straightforward Strategy for Investing Retirement Savings

According to the AARP, Americans has saved nearly $22 trillion for retirement in their 401(k), IRA and pension accounts. While that seems like an incredible amount of money, experts say that it’s not nearly enough to get everyone through retirement comfortably.

The truth is, many Americans are intimidated by the thought of retirement and having to put enough money aside to live through it securely. At the end of the day however, the ability to live the lifestyle that you want in retirement is completely up to you as an individual, and what you do today will definitely have an effect on how you’re able to live in retirement tomorrow.

With that in mind, below is a straightforward strategy that anyone can use to invest their retirement savings and ensure that a comfortable retirement awaits. Enjoy.

First, determine how much money you should put into stocks. Even though past performance doesn’t predict future results, stocks have always produced higher returns than almost any other investment. A good rule of thumb is to subtract your age from 100 and, whatever the remaining number is, invest that percentage of your retirement savings in stocks. So, using that rule, if you’re 50, you should invest  50% in stocks. Some financial experts however are recommending using 110 or even 120 to start, rather than 100, because, as people live longer, they’ll need their money to last longer as well.

Step # 2 is to determine what your tolerance for risk happens to be. Frankly, although stocks generally  give a better return on your money, they’re also more risky and, with the stock market at an all-time high right now, it could definitely drop again sometime soon.

What this means is that you need to understand your tolerance for risk because, frankly, higher risk means higher returns and lower risk means lower returns. Being able to balance the two not only means that you’ll be able to sleep better at night, but also get a better return on your money over time.

Step  #3 is to pick your stock fund. Purchasing shares of index funds is a simple way to invest that a lot of investors prefer. For example, the Vanguard 500 Index Fund is very similar to the Standard & Poor 500 stock index, and their record of bringing returns to their investors is nearly as good.

Your next step, #4, is to diversify. While the old adage of “not putting all of your eggs in one basket” might seem a little silly (if you have 20 eggs, using 20 baskets to carry them really doesn’t make sense) the fact is that spreading your investments around will protect you should one of those investments fail. This reduces your risk and limits your losses due to the fluctuations of the market.

Step #5 is simply to invest the rest of your portfolio.  One suggestion is to put half of your money into a low-cost intermediate bond fund and then take the other half and invest it in a money market deposit account. While it’s true that bonds pay considerably lower than stocks in the long run, they’re a good bit safer. Also, money market  deposit accounts are insured, up to $250,000, by the federal government.

Our last step,  #6, is to know what your “investment time horizon” happens to be. One of the bigger factors of where to put your money, and how much you should put into stocks, depends on when you’re going to need that money as well. The longer that you can let your money sent, the higher risk that you can tolerate. On the other hand, if retirement is five years down the road, your approach to risk is going to be much different.

Of course if you have any questions about investing you can always send us an email or leave a comment and we’ll get back to you sometime very soon with answers and advice.

 

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