How Much of My Money Should Stay In Safe Investments?

And how does time until retirement affect my investment choices?

Keep your money safe as you get closer to retirement
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You need to keep enough money in liquid, safe investments to cover, at a minimum, three to six months worth of living expenses. This means if you need $2,000 per month to live comfortably, you need to have $6,000 - $12,000 in safe, easily accessible investments like bank savings accounts or money market funds.

  • The less secure your employment, the more money you want to keep in safe investments.
  • 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, it makes sense to invest for growth, and not worry about the market fluctuations. If you have fifteen or more years until you will use the money, who cares what the market is doing this week, this month or this year? Your concern should be getting the highest potential long-term return.

    For those retiring in the next few years: You will want to have three-to-ten years' worth of withdrawals in safe investments, like money market funds, certificates of deposits, agency bonds, treasury securities, and fixed annuities. 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. Ideally you start this process about ten years away from your desired retirement date.

    This safe money is the money you will use for living expenses during your first few years of retirement.

    This strategy of taking little risk with this portion of your portfolio allows you to leave the remainder of your investments invested for growth, potentially providing some protection against inflation. When your growth investments have a good year, you take profits and use the proceeds to replenish the safe investments 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 reach retirement, you have enough money in safe investments to meet your income requirements for many, many years.

    Special considerations come into play in the ten years prior to your desired retirement age. In this ten-year-window, every time your risky investments (like real estate and equities) have a year with above-average returns, you should take profits and increase the amount of money you have allocated to safe investments. Unfortunately, most investors do not 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.

    You will have the most success by building a solid, long-term plan and sticking with it. This has been proven to deliver better results than trying to time the market.