How Much of My Money Should Stay In Safe Investments?

And how does the time I have until retirement affect my investment choices?

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Investing isn't a set-it-and-forget-it endeavor. Your portfolio should change over time, and it should also adapt as your financial profile matures. When you're young, you can afford to take more risk, but as you get older you'll find more peace of mind by moving more funds into safer investments.

There are many reasons to keep some of your money safe, and many ways to do so. Learn the factors at work, and how you can invest without giving up the financial security you need.

Why Invest for Safety?

If you invest at all, the risk of losing money will always be a factor. Some amount of risk (and loss) is a fair trade-off for the chance at greater returns, but it's wise to balance out this risk with safer investments. And the health of your portfolio isn't the only reason to invest in safer assets.

You also need a store of quicker access to cash in an emergency fund or "rainy day fund" as a cushion in case of a sudden unexpected event, such as if you lose your job, or need to pay for emergency health care. This is wise for people of all ages. The common practice is to keep enough money in liquid, safe assets to cover three to six months worth of living expenses. This means if you need $2,000 per month to live up to your level of comfort, you should have $6,000-$12,000 in safe, easy to access accounts like bank savings or money market funds.

Keep these two rules of thumb in mind:

  • The less secure your job, the more money you want to invest safely, or keep in safer accounts.
  • The closer you are to retirement, the more money you want to keep in safe investments.


For Those Far Away From Retirement 

For money in IRAs and other retirement accounts, invest for growth, and don't worry too much about the ups and downs of the market. If you have 15 or more years until you will use the money, who cares what the market is doing this week, this month or this year? Focus on getting the highest potential long-term return.

There is one caveat: Unless you have proven experience as an investor, don't invest your own money. Trying to make a quick profit with your future retirement funds, without help from an expert, is a really bad idea.

For Those Who Plan to Retire in the Next Few Years

If you plan to retire within five years, you should work to have enough funds to cover three to ten years' worth of future withdrawals in safe investments. Safe accounts are those that might grow very slowly, but with little risk of losing funds. They can be combined with others, or used in methods to save and invest at the same time.

Safe investments may include money market funds, certificates of deposits, agency bonds, treasury securities, or fixed annuities, to name a few.

One way to do this is to create a bond or CD ladder, where each year, a safe investment matures, and the principal becomes available to you. To make the most of this process, you should start about ten years from the date you plan to retire.

This safe money is the money that will replace your former paycheck. You will use it to pay for basic living expenses during your first few years after you retire. This method of taking a small amount of risk with this portion of your portfolio allows you to leave the rest of your holdings for growth. The results are twofold: first, you'll have some protection against inflation down the road. Then when your growth investments have a good year, you can take the profits and use the proceeds to replenish the safer holdings that you have been using to fund your living expenses.

When Is the Right Time to Switch to Safe Investments?

You should switch to safe investments on a scheduled plan so that by the time you retire, you have enough money in safe investments to meet your income needs for many years.

There are a few things you should take into account in the ten years before you plan to retire. First, in this ten year window, each time your risky investments have a year with above-average returns, you should take profits and increase the amount of money you have allocated to safe investments. Many new investors fail to do this. Instead, they buy risky investments after they have gone up in value and then sell them in a panic after they have gone down in value.

Don't Become Too Safe

Safe investments are critical for two main reasons: to ensure that your portfolio is diversified, and to maintain a degree of financial security for when unplanned events occur. Still, if your portfolio is too safe, you may find that it does not produce enough income to reach your goals.

If you're someone who hasn't saved enough for retirement, you may have to keep your level of risk slightly higher as you go into your retirement phase to produce more income.

Unless you're a seasoned investor, you may want to reach out for help to balance the levels of risk and safety as you invest. A financial professional can assess your risk profile based on your own tolerance, goals, and age, as well as outside market factors. Talk to a trusted advisor, broker, or planner and ask them to create a plan that sets you on a strong financial foundation without risking too much.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.