When making decisions about how to invest your retirement money, education pays off. You do not want to gamble with your retirement funds, nor is this the time to try something new and unproven. There are several steps you can to take to figure out where to put your retirement funds. You will be wise to consider them all before you make a decision.
Set Realistic Expectations
Despite the turmoil in the investment markets, those who understand how investing works will tell you that when it comes to your retirement money, nothing beats a diversified portfolio. But what does that mean? It means you develop what is called an asset allocation model, which tells you how much of your retirement money should be in stocks versus bonds.
You look at the historical returns and risk associated with your asset allocation model and the amount of money you need to withdraw each year. You then rebalance your account on a regular basis and stick with your long-term investment plan. You must develop realistic expectations that some years you will have better returns than other years and view your retirement investments over the course of your life, not over the next three months or one year.
Everyone wants the perfect investment; something safe, which produces steady income and will grow in value over time. Such an investment doesn't exist. Educate yourself on investment basics to understand the trade-offs you must accept when investing.
There is no free lunch. You can put your retirement money in safe investments and accept the guaranteed — yet lower — rate of return that they offer. Or you can choose to take a known level of investment risk and build a portfolio that offers the possibility of delivering higher returns than what the safe investments may deliver. A diversified portfolio includes some investments that are safe, some that are designed to produce income, and some that will grow to provide income 10 to 15 years down the road.
Learn and Get Advice
The best thing you can do before you decide where to put your retirement money is to get educated and seek professional advice. You can do this by reading books on investing so you understand basic investment concepts, or subscribing to a respected finance magazine and reading all the articles for one year.
You can also watch online investment classes on YouTube, or look to see what classes may be offered near you at a local college or community center. If you prefer to delegate, then interview several financial advisors and look for someone who is willing to educate you while also providing planning and investing services.
Avoid Big Mistakes
People make mistakes with their retirement money because of greed or ignorance. Greed kicks in when you see an investment that you think will deliver above-average returns. Ignorance is a factor when you don’t know what is and is not possible. This makes it easy for someone to talk you into something that may not be a good choice for you.
When you understand how investing works, you know that above-average returns are not possible over an extended period of time. The saying "pigs get fat, hogs get slaughtered" captures this tendency to get in trouble if you are too greedy. Many investments that appeal to the greed side of you may turn out to be frauds or Ponzi schemes. If it sounds too good to be true, stay away. As you get closer to retirement, avoiding big mistakes is more important than finding great investment returns.
Make a Long-Term Plan and Follow It
Making a retirement plan helps you make smart decisions about how to invest. Your money has a job to do. It is no longer about how much you can accumulate; instead, it is about delivering a reliable monthly retirement paycheck. Investing for income is different and your approach needs to change.
The retirement decision is the biggest financial decision of your life — bigger than buying a house and far bigger than buying a car. If financial decisions are not easy for you, consider hiring a retirement planner. If you like math and numbers, play with online retirement calculators or draw up your own retirement income plan in a spreadsheet format.