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Saving money to fund a comfortable retirement is perhaps the biggest reason people invest. As such, finding the right balance between risk and investment return is key to a successful retirement savings strategy.
Here are a few tips for ensuring you make the smartest possible decisions with your retirement savings:
You always want to keep a portion of your retirement investments in safe alternatives. The primary goal of any safe investment is to protect what you have rather than generate a high level of current income.
All retirees have some a reserve account (an emergency fund). This account should not be included as an asset available to produce retirement income. It is there as a safety net; something to turn to for unforeseen expenses that may come up in retirement.
Also, if you are not sure what to do with your money, park it in a safe investment while you take the time to make an educated decision. Too many people rush to put their money into an investment because they feel like it should not be sitting in the bank for too long. They end up making a rush decision, which is never a good idea.
Since you typically can’t get your money back from an annuity once it starts paying out, you might simply put the money in an investment account with a systematic withdrawal plan. Such a plan can be established in both non-retirement and retirement accounts with a form instructing the investment company what sum to distribute monthly, quarterly, or annually. You keep control of your money but you don’t get the guarantee of an annuity.
Letting markets dictate your investment decisions in retirement may mean too much equity and attendant risks at a stage when you cannot afford to do so. A large corpus available to invest and the promise of high returns whether from equity investments or other products may tempt a larger-than-prudent investment at this stage. Markets may hit a bad patch and take a couple of years to recover. Or, the high-yielding investment may disappear like many of the ponzi schemes retirees have fallen prey to in the past.
Let asset allocation drive investment choices. It takes away the impact of recent experiences, good or bad, from investment decisions. Build a diversified mix of stocks, bonds, short-term debt investments, in accordance to your income needs and your comfort with market volatility.
Bonds represent debt. So if you buy a bond, it means somebody owes you money and is regularly paying you interest. When assembled into a properly diversified portfolio, the safest bonds such as those issued by the federal government, government agencies, and financially sound corporations can be a crucial source of dependable retirement income.
Unlike bonds, stocks represent ownership and company owners may get regularly-scheduled dividends. Not all companies pay dividends, though, and dividends can be stopped if a company gets into financial trouble. Plus, stock prices sometimes plunge. That’s why retirees who buy stocks for income should probably limit their exposure to this strategy and stick with large, very stable companies with a history of paying dividends.
Rental property can provide a stable source of income, but there will be maintenance requirements, and when you own real estate, you will inevitably incur unanticipated expenses. Before you buy rental property you need to calculate all the potential expenses you may incur over the expected time frame you plan to own the property. You also need to factor in vacancy rates no property will be rented 100 percent of the time.
Investment property is a business, not a get-rich-quick proposition. For those with real estate experience or those who want to put the time in to make it a business rental real estate can make a great retirement investment.
Your retirement income may need protection from bad markets and against common mis-steps that can be avoided with a little planning. One way is to create a buffer that will protect the income from periods of low interest rates and bad markets by building a cash cushion that is adequate to meet expenses in the immediate three to five years that will prevent the need to draw down on investments when their values have fallen.
When markets are good, use the gains from rebalancing the portfolio to refill the cash bucket. The income required for the immediate future is protected from volatility by locking into products that combine safety and good returns such as government-sponsored fixed-income products.
Retirement income funds are a specialized type of mutual fund. They automatically allocate your money across a diversified portfolio of stocks and bonds, often by owning a selection of other mutual funds. The investments are managed with the goal of producing monthly income which is distributed to you. These funds are constructed to provide an all-in-one package that is designed to accomplish a particular objective.
With a retirement income fund, you retain control of your principal and can access your money at any time. Of course, if you do withdraw some of your principal, your future monthly income will subsequently go down.
Emergency fund has as much relevance in retirement as it does in the earlier phases of life, though the type of emergency may be different in the latter years of your life.
When you are earning, the emergency fund is a cushion to fall back on if the income were to go down. In retirement, it is to protect the income from a large, unexpected expense. Also, healthcare is a big expense that can come up in retirement. Even though health insurance should be an integral part of retirement planning, there may be deductibles or uncovered expenses and regular income may not be enough to fund those.
Life insurance really isn’t meant to be a retirement plan, but it can be a welcome additional income source for retirees who find they’re a bit short each month. The safest policy for the job is one like whole life or universal life that accumulates cash value on a schedule. People can access the cash reserves via a loan or an actual withdrawal. Loans and withdrawals don’t affect the policy’s face value, but they do reduce the policy’s overall death benefit by a like amount.
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