Peter Lynch once said, “In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.” We all know that stashing money in our mattresses isn’t a smart way to prepare for retirement. We need to put that money to work, so to speak, via investments that grow over time.
But with investing comes some degree of risk. Take too much risk, and you might lose. Avoid risk entirely, and you probably won’t reach your retirement goals. So how much risk is “too much”, and how much is “not enough”? That will depend upon your individual risk tolerance.
Every situation is unique, but over time we have found that the following rules apply to most people.
Younger people can handle a bit more risk. When you’re in your thirties, and retirement is at least thirty years away, you probably have time to make up for any blunders. Riskier investments, which generally hold the potential for more growth, are often attractive at this time.
Your tolerance for risk will probably decline as you near retirement. For around age 60 or so, retirement looms on the horizon. At this point you probably don’t feel comfortable taking huge risks with your principal. Now you’re more focused on security, and establishing a steady stream of income that will hopefully provide for you throughout retirement.
A completely risk-free approach to investing will usually not be feasible. All investments come with some degree of risk, albeit very small in some cases. You probably wouldn’t want to completely rule out potential for growth, anyway. Inflation will impact your purchasing power quite significantly over the coming decades, so most people wouldn’t want to establish a retirement income that doesn’t grow at least a little bit.
It’s important to understand your own risk tolerance before making big decisions about your portfolio. Call us to schedule an appointment, and together we can compare your need for growth with your desire for security.