Why playing it too safe with retirement savings could be a mistake

2024-12-24 21:09:35 source:lotradecoin integration with payment systems category:Markets

The dangers of taking huge risks with your retirement savings are pretty well known. If you try to get rich quick by investing big in a cryptocurrency you think will go to the moon, you run the risk of losing a huge chunk of your savings if things don't work out. That could set you back years and may have a substantial effect on your quality of life in retirement.

You shouldn't gamble with your savings. You need to take a measured approach to protect what you have. But you also don't want to be too cautious. The downsides may not be as obvious, but they can hurt your retirement just as much as taking too much risk.

The problem with being too conservative

Being conservative with your money, perhaps by investing it mostly in bonds or certificates of deposit (CDs), will reduce the likelihood of loss compared to investing your money in the stock market. You'll even earn a little on your savings over time, but it's not a solid retirement strategy.

While your savings are growing slowly but surely, inflation is also eating away at your money's buying power. What you can buy with $1 today may require $1.10 or $1.25 in the future. You need to outpace inflation to grow your wealth over time. Otherwise, you might find that your financial position remains stagnant or gets worse even while your account balances continue to climb.

How to strike the right balance

Investing in the stock market helps you avoid a stagnant financial position. It can be intimidating, but with the right strategies, you can grow your wealth more quickly while still minimizing your risk of loss.

Only invest money you won't need in the next few years

Investing in stocks can help you grow your money more quickly than investing in bonds or CDs, but there's also a risk of loss. Stocks can be volatile in the short term, so it's generally not a good idea to invest money you need for emergency expenses or cash you plan to spend within the next five to seven years. A high-yield savings account or a CD is more appropriate for these funds.

Diversify your portfolio

You need to diversify so that no one stock has too great of an effect on your portfolio. One of the best and cheapest ways to do this is by investing in an index fund. Index funds are bundles of investments that mimic the performance of a market index, like the S&P 500. They contain the same investments in roughly the same quantities, so your money is spread out between dozens or even hundreds of companies.

Index funds are also among the most affordable investments available. Some of the best S&P 500 index funds charge an expense ratio of 0.03%, or about $1 per year for every $10,000 you have invested in the fund.

You can invest in index funds through IRAs, and your workplace retirement plan may offer this as an option as well. Workplace plans also offer target-date funds. These are designed to be hands-off investments that grow more conservative as they approach the target retirement year, listed in the name of the fund. These can also be good options for those who aren't comfortable picking their own investments. But target-date funds have higher fees than index funds.

You'll want to keep some money in bonds as well, especially as you near retirement. One common rule says you should keep 110 minus your age in stocks with the remainder in bonds. That means a 40-year-old would have 70% invested in stocks and 30% in bonds. This balance helps you grow your savings without exposing you to unnecessary risk.

Accept loss as part of the investing process

Finally, you'll need to accept the fact that you'll lose money periodically. Fluctuating prices are a normal part of investing and sometimes that won't work in your favor. But it's important not to make any emotional decisions when you see your portfolio's value drop. Oftentimes, it will rebound if you just wait it out.

If you have good reason to believe you have too much money invested in one particular stock or that you have more money in stocks than is appropriate for your age and risk tolerance, that might be a good reason to move some of your savings around. Otherwise, be patient and trust that over the long term, things will move in a positive direction.

The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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