A few days ago, my friend Kathy got a call from her mother Linda asking for some retirement advice. Linda is 60 and she plans on retiring soon ? in the next year or two ? but she?s also very concerned about the stock market. In her mind, the best retirement funds would be any that give her a decent return (at least 5%) but don?t expose her to any risk.
I was speaking with Kathy recently on another matter when she brought her mother?s question up. I told her that Linda?s request was understandable ? many soon-to-be retirees think this way. The problem is that this kind of framing is actually rather dangerous.
As you can imagine, Kathy was taken aback by my comment so I explained further.
How to Plan for Retirement ? Think Long-Term
Yes, Linda faces short-term volatility risk, but she also runs the risk of running out of money over the long-run. She might have enough money to retire now, but what about 20 years from now? Will she still have enough money to stay retired? Linda was only focusing on the short-term and completely ignoring her long-term risk.
I understand why Linda is doing this, of course. When she retires, she won?t be able to earn more money and as a result, she wants to make sure that she doesn?t lose her capital. That makes sense.
But when Linda thinks about retirement investing, she has to consider both the time frame until she retires and the time frame after she retires. So if Linda is 60 today and wants her money to last until she reaches age 95, her time frame is 35 years.
That being the case, she should ask how to invest that money to provide the least risk and the greatest retirement income over that extended period of time. Of course she cares about short-term security, but she needs to think about long-term security as well. And the smartest way to invest over a long-time period means she has to include at least some equity investments in her portfolio. Unfortunately, the price she?ll pay in order to do that will be accepting some short-term risk.
Over the long-run, even a balanced portfolio should do the job of providing income, safety and growth ? but it will not give her a risk-free portfolio.
The Other Option
She can invest in the bank and she?ll have a ?safe? investment that won?t fluctuate in value. That?s going to make her feel secure over the short-run, but over time, those low returns will not keep up with inflation. Linda will find herself eating into the principal sooner or later. When she runs through all her money, how much security is she going to have? Not much.
Linda has an emotional need for short-term security ? I understand that ? but she also has an objective need for investments that can reduce the real inflation risk she faces over the long-run. These two needs conflict with each other, and the solution is for Linda to compromise and invest based on her intellect rather than her emotions.
Looking for long-term investments that provide great income and no risk is like going to the Ghirardelli Chocolate factory and asking for the best chocolate that doesn?t make you fat. It doesn?t exist. Everything has trade-offs.
Are you willing to make investments that make you uncomfortable at times? If not, are you willing to accept low returns?
This post was contributed by Neal Frankle, a CFP based in Los Angeles and an authority blogger at Wealth Pilgrim.com. His most recent post was his Scottrade Review.
Related Retirement Articles
Source: http://www.gobankingrates.com/retirement/the-very-best-investment-for-soon-to-be-retirees/
kourtney kardashian pregnant again apple juice apple juice occupy la miranda kerr adriana lima victoria secret angels
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.