At this stage, retirement might seem a long way off, but it's never too early to plan for it. The way you invest now will be much different than the way you invest in 30 or 40 years, and you need to be ready for the transition. As you get closer to retirement, the time you have left to invest becomes shorter and shorter. This leaves you more vulnerable to the inevitable ups and downs of the market, so you will need to adjust your portfolio accordingly.
Estimate what income you will need during your retirement years. Consider what you will need to cover your living expenses, health costs, vacations and other expenses. One useful rule of thumb is to estimate you will need 70 percent of your current salary.
Calculate what your withdrawal rate will be based on your estimated income. Divide the total value of your investments by your estimated yearly income during retirement. This will determine how long your savings will last and inform your investment decisions. A guideline some financial consultants use is the 4 percent rule, which assumes a life expectancy of 25 years after retirement. This means that if you limit your yearly withdrawal rate to 4 percent of your savings, they will last for 25 years.
Invest in income-generating securities, such as bonds, CDs and dividend-paying stocks. These conservative assets will offer low risk to your savings, especially if you invest in Treasury bonds and CDs guaranteed by the FDIC. Use this strategy only if by retirement age you can afford to buy sufficient income-generating securities to meet your income requirements.
Purchase an annuity with part of your savings and invest the rest in growth stocks. An annuity is a long-term investment that guarantees you will receive a stream of income for the rest of your life. The guaranteed income allows you to be more aggressive with the balance of your portfolio.
Keep your savings in an investment portfolio and make regular withdrawals from the income and principal of your investments. Spread the risk of your portfolio by investing in stocks and in bonds. This strategy will allow you to generate income throughout your retirement and provides more flexibility if you wish to access your savings. However, there is a risk you run out savings before the end of your life.
- This information is not a substitute for the advice of a professional financial adviser. With investments there is always the risk of losing money and there is no way of predicting what the market will be like by the time you reach retirement age. Seek the help of an experienced and qualified financial adviser before making important investment decisions.
Andrew Latham has worked as a professional copywriter since 2005 and is the owner of LanguageVox, a Spanish and English language services provider. His work has been published in "Property News" and on the San Francisco Chronicle's website, SFGate. Latham holds a Bachelor of Science in English and a diploma in linguistics from Open University.