For Mark Roberts’ Use:
A basic investment principle is that assets which have the potential for greater growth usually carry greater risk. Investors who are two or three decades away from retirement have more time to recover from losses, so they may decide to accept the risk of more aggressive investing. However, those nearer to retirement age generally shift their priorities to conserving principal, and therefore pursue a more conservative asset allocation. This strategy helps to manage risk, though it does not completely guarantee against losses.
Of course, without some growth, your principal can suffer from withdrawals. It’s also important to keep in mind the effect inflation has upon spending power. It’s important to find a balance between growth and stability, so consider the following factors.
You may live much longer than you think. With the average life expectancy increasing, your savings may need to last much longer than you originally expected. This means you also have more time to pursue more growth in your portfolio.
Consider other forms of income. While Social Security is not intended to be a primary source of income during retirement, it can be pieced together with other forms of earning to create a viable monthly income. Rental properties, business income, or an inheritance may help you to gain more flexibility in your investment strategy.
Assess your goals and let your strategy reflect them. It’s important to analyze what you really want to accomplish during your retirement years, and to be realistic about the cost of pursuing those goals. Don’t assume significantly more risk simply because you have expensive goals, but this is one piece of the equation to keep in mind.
Feel comfortable with your strategy. Consider your tolerance for risk, and be prepared for market volatility if you choose a more aggressive approach to investing. This should be carefully discussed with your financial advisor, so that together you can develop an approach that is right for you and your portfolio.
Source: Investment Company Institute, 2011