Time, Tolerance and More
Time, Tolerance and More — Factors That Affect Your Retirement Savings
Make sure your investments are in a variety of baskets.
Here are just a few of the things that could significantly affect your savings.
Time horizon –Financial advisors always ask their clients, “What is your time horizon?” What they mean is, “How much time do you have between now and when you want to start utilizing your savings?” How much you need to save to reach your objectives and how long you have to save it will help you decide how much you should contribute regularly to your retirement savings.
Risk tolerance – Another common question advisors ask is, “What is your risk tolerance?” "This means how much risk are you willing to take with your investments to reach your goals?" Risk tolerance ranges from very conservative to very aggressive.
Very conservative investments avoid risk. These investments may make minimal gains because they are designed to protect a saver's original investment. This is referred to as “preserving capital.” At the opposite end are very aggressive investments; they take great risk, but have a higher potential of making significant gains. On the flip side though, very aggressive investments also have a high potential to suffer great losses. Aggressive investments often experience a lot of ups and downs. Many investors choose to have a mix of conservative, moderate and aggressive investments in an effort to reach their own investment goals.
Contributions – These days, nearly everyone expects to have to save for their own retirement. Logically, that means taking some of what you earn today and putting it away for later. A good strategy for this is called dollar cost averaging (DCA). With DCA, you make steady periodic contributions to a savings plan. And, because you invest whether the market is up or down, you buy more shares when the market is low and fewer shares when the price is high. While DCA does not guarantee gains or protect against losses, it does help take emotion out of your investing while helping you grow your holdings.
If you contribute steadily over time to a tax-deferred retirement plan such as an employer-sponsored 401(k) or your personal IRA, you have the opportunity to earn interest on interest. That can help your savings grow in good markets and helps protect you from losing ground in down markets.
Diversification – Just as you shouldn’t put all your eggs in one basket, you should make sure you vary your investments, too. Like DCA, while diversification does not guarantee gains or protect against losses, it will help you spread the risk over different types of investments, industries, countries, durations, etc.
For example, if you only invested in the oil industry, and a natural disaster or international event struck a blow to oil production, your entire investment would suffer. But if you diversify – putting your money in oil, telecommunications, insurance, municipal bonds, etc. – and one industry takes a hit, it won’t take your entire portfolio down with it.
Whether you have five years or 40 until retirement, you can take action now to help improve your options for retirement. Learn as much as you can about personal finance. The more you understand about investing, the better position you will be in to make good decisions about your money and retirement.