While summer vacations and national holidays typically provide a break for everyone who would be considered a member of the working public, there is one big break ahead that’s a priority on most everyone’s calendar — retirement. Personal circumstances make planning for retirement different for each individual, but there are several considerations that apply if you break it down by the amount of time you have left until you retire.
If you have at least 10 years to go until you plan on retiring, you still have the advantage of time on your side. One of the most basic principles of investing is putting your money into different investment vehicles and then leaving it there so you can reap the benefits of long-term returns. With more than 10 years to invest, you might be able to afford to take on a little bit more risk with your investments. While equities — such as stocks — have an inherent risk of losing money, they also have a history of providing significant returns over a long period of time. Just keep in mind that past performance is no guarantee of future results.
Probably the biggest advantage of getting an early start is the benefit of compounding earnings. Based on the investments in your retirement portfolio, the money you put in has the potential to earn more money for you — whether through interest payments, dividends, or other means of growth. In many cases, those earnings can be reinvested into your portfolio, further enhancing the total value of your savings and allowing your money the opportunity to “make money” for you.
If your retirement is less than 10 years away, then it’s time to start making subtle adjustments to your investment mix. Hopefully, at this point you’re not just getting started, but rather taking a look at how your investments are allocated and making sure they appropriately match your risk tolerance, your investment objectives and your relatively short time horizon. Because you have less time to work with, you still want to have some investments that offer growth, but you also want to begin looking at preservation of principal through fixed income alternatives such as bonds, which may provide a little more stability in your portfolio and help reduce your overall risk.
Finally, at some point you’ll reach that day that you once thought was so far off. When you find yourself officially in the position to retire, you will have a whole different outlook on those funds you have set aside for just that purpose. Instead of making contributions to your retirement funds to help them grow, you’ll be looking to maintain income from those investments. You’ll likely begin taking distributions from them to pay for your day-to-day expenses. A thorough review of your investments will help you clearly see just how much you have saved, and how you will have to plan your distributions so you don’t run short on funds during your retirement.
Financial preparation for retirement is something that is different for every individual. To make sure that you’re on the right track, take the time now to assess your own situation and see what you can do to make sure you’re ready when it’s time for you to retire.
• William J. Hertzog, CIMA, is first vice president of investments for Wells Fargo Advisors, LLC, in Ahwatukee. Reach him at (602) 952-5133 or www.TheHertzogGroup.com. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Note: Investment and insurance products are not FDIC insured, not bank guaranteed and may lose value.