Investments in a retirement account. There are a LOT of really good investment choices out there to pick from. It can be overwhelming really. If you have a 401k or other retirement plan you can get overwhelmed really quickly at the choices that you might have to pick from. So today, I’ll help you go over some considerations to take into account when you are investing in your retirement account. Let’s do it.
(1) How Long Until You Retire?
The first consideration that you should take when investing for retirement is how long you think that you will have until you retire. When are you going to need the money? Are you 58 years old and reading this now? If so, you don’t have that long until you retire. But if you are 24 and reading this, you have quite a while. Not to say that you couldn’t retire early if you choose, but you will likely have longer than the 58 year old previously mentioned.
A lot of people don’t know when they will retire. They just haven’t thought much about it. So here is a suggested chart of when you will probably retire. Once again, you could retire early or you could retire late. But these are the average times.
| Year of Birth | Anticipated Year of Retirement |
| 1955-1960 | 2020-2025 |
| 1960-1965 | 2025-2030 |
| 1965-1970 | 2030-2035 |
| 1970-1975 | 2035-2040 |
| 1975-1980 | 2040-2045 |
| 1980-1985 | 2045-2050 |
| 1985-1990 | 2050-2055 |
| 1990-1995 | 2055-2060 |
| 1995-2000 | 2060-2065 |
| 2000-2005 | 2065-2070 |
Why is it so important to know how long you have until retirement? Other than just planning on how you are going to live, who you will live with, how much you will go fishing or see grandchildren, etc., you also have to know what kind of risk you can take with your retirement account.
We’ll get to that next.
(2) Adjusting Risk as You Get Older
This retirement consideration is really important.
Financial professionals disagree on a lot of things. However, one of the most commonly agreed on personal finance guidelines is that the older you get, the less risk you should take.
There are all kinds of different investments out there. Millions of them. Some of them are really safe and some of them are really really risky.
For example, if you invest $100 in Amazon today there is a really good chance that you will still have that $100 (and probably a lot more) by the time you retire.
But what if instead you invest that same $100 with your uncle Bennie in his small business venture when Uncle Bennie has no idea how to run a business and has never had a steady job in his life? There is a really good chance that that $100 will be long gone by the time that you retire. You will never see it again.
Those are two extreme examples but the point serves.
When you invest in your retirement, you can afford to take on more risk when you are younger. Why? For two reasons:
- If you take on more risk, you have the potential for a higher reward (a higher return on your money)
- If you take on more risk when you are younger and your investment goes down or goes away entirely, you have a longer time to recover from that loss than if you were getting ready to retire soon.
This doesn’t mean that you should invest all of your money in Uncle Bennie’s ridiculous business idea. (You probably shouldn’t invest any money in it tbh.)
This just means that while you are younger you can afford to invest more of your retirement money into smaller companies that don’t have a long track record.
That’s not to say that you should invest ALL of your money in risky companies. It just means that you should invest a greater percentage of your portfolio in riskier companies when you are young. And as you get older, you should scale that back.
Here is an example:
Take Stephanie. Stephanie is 26 and wants to invest in her retirement. Since she is young, she wants to invest a greater percentage of her retirement dollars in smaller companies and a smaller percentage of her portfolio in larger companies.
For simplicity’s sake, we will leave out any international, government bonds, etc and just focus on large companies and small companies.
Her portfolio would look something like this:
But as Stephanie gets older, she should change her investment allocation to something that is more conservative. This is because as she gets older, if her investments go down, she doesn’t have as much time to recover.
So Stephanie’s portfolio at 56 years old would look something like this:
The amounts/percentages may not be perfect for Stephanie. But this is simply an illustration.
Just remember, as you get older, your investment strategy should become more conservative.
(3) What is Your Comfort Level With Risk?
This is the biggest question. There is no right or wrong answer. My comfort level with risk is going to be different than yours. And your comfort level with risk will be different than the next person reading this article.
To find out your risk tolerance there are a bunch of risk tolerance quizzes out there. Here is one from the University of Missouri.
Once you know and understand your risk tolerance, you can begin to make informed decisions about your retirement account.
Final Thoughts
I understand that we have just barely scratched the surface of how to invest your money for retirement.
However, these are the three largest considerations that you should take when you are investing in your retirement.
If you haven’t taken these considerations and you have been contributing to your retirement, that is okay! You are ahead of the pack. Just take one of the risk tolerance quizzes that I mentioned before and find your risk tolerance.
After that make any necessary adjustments to your current retirement contributions that you are making now.
The most important thing is that you are ACTUALLY saving!
I am here to help you!
You can do this!
Until next time!
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