At the age of 30 or 40, retirement seems really far away and planning for it may not really be on the cards for most people.
Statistics show that most people receive traditional social security, some form of pension plan, and some part of their personal savings to handle their expenses after & during retirement, this does not mean they are set and do not need to be in a proper financial plan.
So if you are one of those people who have reached the age of 60 and are yet to come up with a solid investment plan and don’t really know what to do with your savings, the adage “it’s never too late” to invest holds true, so don’t worry too much but you are behind the curve. Please read on…
Depending on the age that you start to invest your savings, your investment needs will change. Instead of just focusing on the accumulation of money to aid your retirement, you also need to think of reducing the risk and protecting the savings that you are investing and have merited over time. Of course, investment gains are very important but it becomes more important to invest in ventures that have less risk quotients because there really isn’t much space to work in any kind of setback.
Investors should think carefully about their goals and look at their options before determining which type of investment offers them everything they need.
The answer to the question, “how much risk should you court?” is one that differs from individual to individual. Some people are ready to invest their savings in riskier ventures, but as an investor becomes closer to retirement age, it is prudent to reduce the risk as much as possible. Without a doubt, the riskiest investment at any age is the investment of your savings in the stock market. At 60, investors should look at creating a portfolio that has very little to do with investment in stocks, certainly not individual ones. But this all depends, some stocks are much safer than others but this is just a general rule. It also depends on how much you are planning on investing and much money you can risk. You may be passing up clearly superior returns.
If you do not have time to read up on individual stocks and you do not know what a P/E ratio is, then perhaps you should avoid this type of investing.
Some financial analysts and advisers are of the opinion that exposure to the stock market and equity related investment should be equal to about (120-x) with x being your current age. So for a 60 year old person, no more than 60 percent of your investments should be in the stock market, if that. Instead of investing in stocks, investors can consider investing in fixed-rate securities or other low risk options. Experts suggest keeping equity investments at 50 or 60 percent and to only go higher if the investor already has a pension plan or intends to work past the age of retirement.
Diversification – Mutual Funds
Reducing risk does not mean that you cannot make the most out of the volatility of the stock market. Instead of investing in individual stocks and courting risk, investors at 60 can consider investing in diversified mutual finds. This way you will be able to hedge against the rapid price movements of the stock market while you still enjoy a limited exposure to the stock market.
A bond, basically, works like a loan for the corporation/government entity and it is one of the most popular fixed rate investment options available. In such a form of investment, the investor loans a certain amount of money to a corporation or government entity. Over a period of time, the investor received regular interest payments and receives the entire principal amount back when the bond reaches maturity. For people who are close to retirement, bonds are a fantastic option because they are a relatively secure investment and provide a steady source of income. Government bonds are the most stable options though bonds issued by stable companies are also a fantastic idea.
In general, the higher the risk, the higher the returns in case of bonds. Experts suggest that investors above the ages of 55 and 60 should opt for a portfolio that invest about 25 percent in United States Investment Grade bonds, approximately 5 percent in foreign bonds and lesser than 3 percent in High Yield (H/Y) bonds (H/Y bonds are highly paying bonds that offer a high rate of returns but are issued by companies that have a much lower credit rating).
TIPS – Treasury Inflation-Protected Securities
The current annual inflation rate calculated in the month of February 2013 stands at 1.98 percent. The increase in the price of goods can be a spectacular problem for those investing in their future. Once you retire, your sources of income become limited and inflation can really be a pain to deal with. In order to offset this, investors can opt for the Treasury Inflation-Protected Securities or TIPS. While this is sound advice, experts show that over the last few years, the yields on TIPS have been lower than ever. In essence, this means that if you enter the deal now, you may end up seeing temporary losses if the rates were to rise. In contrast, experts suggest buying in into the Vanguard Inflation-Protected Securities (VIPSX). This fund invests in TIPS for you buy opting for shorter duration options. In case of a high yield on TIPS, your funds will trade at a better value.
As you start investing at a later stage in your life, it is important to squirrel some hard cash away for a rainy day. Some of your portfolio can be diverted to cash to keep it away from any kind of risk or price swings. Experts suggest that your cash value should be somewhat equivalent to the amount you would use as expenses in a year (when you are or were working).
With retirement on the horizon, there really isn’t much time to go through any kind of trial and error type of investment portfolio. Use a retirement calculator to work out your finances. It might be worth your while and worth the value of your savings to approach an experienced and trustworthy company or professional who will invest for you.