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June 1999

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Money Savvy

Investing for Retirement

Experts say retirees will need 60 to 80 percent of their pre-retirement income to maintain their current standard of living. But, these experts note, most investors don't have a long-term plan for their retirement needs.

Formulating an investment plan begins with goal setting. But, as a retirement investor, you should actually have three investment goals:

• Preservation of principal, which means keeping and protecting the money you've already got.
• Growth of principal, or making your money grow into a larger nest egg.
• Earning income from dividends and interest or by drawing on your savings.

To reach all three goals, you need a balanced portfolio that includes different types of investments: stocks, bonds, money market accounts, and real estate. Your portfolio should offset riskier investments with safe ones.

When it comes to risk, the more your willing to accept, the greater your potential reward. You should know how much risk you can comfortably tolerate, as well as how much you need to accept.

If your a nervous investor, you should lean toward safer investments. But keep in mind that, to make your nest egg grow, you have to accept some risk. If your a long way from reaching your financial goals, you may have to accept more risk to increase your return.

In most cases, retirement investing should lean toward the conservative. The first rule is to diversify your portfolio, by including a mixed bag of stocks, bonds, and mutual funds.

Second, reduce risk as you get older. The closer you get to retirement, the less time you have to make up for losses from risky investments that fail.

Third, remember that the riskiest thing you can do is play it completely safe. By sticking most of your investments in the safest, but lowest-yielding, investments, such as insured bank accounts, you miss out on growth. And, with inflation, you could actually lose money.

Keep in mind that you don't necessarily need just one portfolio all the time. Some investors periodically shift their investment strategy, starting aggressively when young, leaning toward moderation during middle age, and ending with a conservative portfolio at retirement. Others argue that a middle strategy is best for most people of all ages.

So before you invest in anything, develop a long-term plan, then work on creating a balanced portfolio.