Golden Rules for Retirement Investing
1. Determine the purpose of your money–What do you want your investment to accomplish.
2. Understand how the investment options work in good times and bad. There is no single investment that always makes money. Best to understand what to expect during down markets so as not to panic.
3. Develop time parameters. Know realistically how much time you have to accumulate savings but also account for how long your money will have to last. For a person retiring at 55 or 60 it is likely that you will live 35 to 40 more years. Don’t short-change your financial future by becoming a conservative investor too soon.
4. Diversify. A diversified portfolio is important at all stages. However, it becomes extremely important when you are depending on income from investments to make ends meet. By investing in stocks, bonds, real estate, etc. you have a chance of overcoming losses and making money every year. Perhaps not as much in any given year as if the portfolio had been entirely in stocks but it would also avoid a year or years of negative returns.
5. Analyze your investment goals.
- Do you want to minimize taxes?
- Maximize after tax dollars?
- Maximize growth?
- Minimize risk?
Are these goals mutually exclusive? No, frequently retirees or “soon to be retirees” focus on minimizing taxes, investing heavily in tax-free municipal bonds and muni-bond funds; they accept a lower rate of return in order to receive tax-free income. In reality going for a higher rate of return and paying taxes can still give you more after-tax income.