There's a terrible problem in retirement investing that concerns how much risk you should take with your retirement funds. It's a seemingly unsolvable financial conundrum of investing in retirement. Let's take a closer look.
On the one hand, you'd like to put all your retirement funds in the bank and keep it safe and secure in FDIC insured accounts. The issue is you will only earn earn 2% on your retirement funds. Let's say you have $500,000 of retirement investment capital. At 2%, the $500,000 would yield you $10,000 annually, not nearly enough for your living expenses. You do some calculations and find out that you would need to also use principal and at the rate you would need to do so, you would exhaust your retirement savings and die broke. On the other hand, you learn about investments that pay 8%. At 8%, the $40,000 a year generated interest income would allow you to not touch your principal. However, the 8% investments carry some risk to your principal. So here's your retirement investing decision: do you keep your money safe in bank accounts with the absolute certainty that you will run out of money and die destitute or do you take the chance of investing for higher returns knowing that it's possible your retirement money might get impaired. When phrased this way, the retirement investing decisions seems to clear up because the former choice is a foregone conclusion of failure while investing for the higher returns may in fact turn out well. The latter choice gives you some probability of retirement investing success.
This is an insidious retirement investing problem because the correct solution is counter-intuitive. Let's pretend you are rich and you have $6 million of retirement funds. With $6 million, you can invest your cash in the bank and earn 2% and have $120,000 of yearly income -- more than you need. But as we see in the real situation above, you have $500,000 and cannot live on 2% interest, or $10,000 annually. You have no choice but to take more risk to earn more. If you don't invest for higher returns, your funds will run out before you do. If you invest for higher returns, even though you take on more risk, you at least give yourself a fighting chance of having your money last through your retirement years. So the paradox is that rich people can invest more conservatively.
We often think of rich people as being able to take more risk. In fact, rich people don't need to take more risk as they can tolerate low returns on large amounts of retirement savings. It is those with less robust financial resources who have no choice but to invest more aggressively if they have any hope of having their retirement savings last.
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To see the proof of this, please look up the Trinity Study. Without boring you of the technical details, I will supply a summary.
That study by university professors looked at retirement investment portfolios over long periods of time. The most conservative investors who kept 100% of their money in government bonds and withdrew 4% of the principal annually, exhausted their principal in 100% of the cases over all 30-year periods measured (let's assume that 30 years is the potential time that one spends in retirement). However, those that invested 100% in stocks and made the same 4% annual withdrawals, exhausted their principal in only 2% of the cases and met with success (they died with money to spare) in 98% of the cases. So those that accepted more risk with their retirement investment selections (stocks over bonds) fared far better.
The lesson: if you are of modest means with a modest portfolio, erring on the side of caution is your major retirement investing mistake.
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I agree that it is a mistake to believe that a portfolio that hold individual investments that are more conservative for a long period of time is the safest portfolio. A portfolio over the long term that doesn't have balanced risk in some investment, is weaker than one that has some riskier individual investments.
it is really an important decision to invest your retirement fun because it is the saving of your whole life
Another important thing to think about is age.
age + wealth = risk acceptance
risk acceptance = asset allocation.
That's how we should think through financial matters
Retirement planning, I've opened an account with a insurance bank which includes life and saving plan... not quite sure how's the return yet but if you have a bunch of cash, i'll say put them into fixed deposit and just use the interest every month... what do you think? as fixed deposit have 0% risk comparing to any other investment although other investment have higher return.
Very counter intuitive and fascinating that the assumption of some balanced risk yields better results for retirees. As you said, dilemma solved!
It's very important on how to invest your retirement benefits because this is lifetime already.
This is great. A big help of information to all especially for those person who wanted to know different retirement plan around the globe. Such a great and brilliant idea. Anyway, thank you for the post, I'll share this to my friends too.
Great summary of the influential Trinity Study. Although first published in 1998, there have been updates, the most recent of which was released in 2009. If people want to check out the original study, here is a link: http://www.aaii.com/journal/article/retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable?utm_source=sitesearch&utm_medium=click
Complicated topic. I agree all the comment above. Speaking of Retirement Planning, in a financial context, refers to the allocation of finances for retirement. This normally means the setting aside of money or other assets to obtain a steady income at retirement. The goal of retirement planning is to achieve financial independence, so that the need to be gainfully employed is optional rather than a necessity.
I think what it comes down to is taking a risk with your investing but a calculated one. Being too conservative will allow your retirement fund to simply not grow enough to provide you with a comfortable retirement.
I would go with high-dividend paying large cap stocks.
I feel that the most important thing is to do your research and make sure you understand completely anything that anyone puts in front of you. People who get scammed didn't do their research and they paid the price. Now, not everyone needs to be a financial genius, but you can educate yourself to know when something is "too good to be true"
Retirement funds would be your last resource upon your retirement, so spend it wise, invest only on a business that you know.
I think the best way to invest is through fixed income vehicles like good bonds but the interest rates are so low.
Retirement is never a subject of simplicity. I for one have been in a rush shoveling money into to my 401k and roth IRA so i can retire on time.
I personally like to take the risk when investing. I go for the medium to high risk stocks and bonds because I feel that it's best "to do it and do it right". I also keep a fraction of my total investment in saving bonds so that I know that I have money to fall on in case something major happens to my portfolio.
It’s very important on how to invest your retirement benefits because this is lifetime already.
I go for the medium to high risk stocks and bonds because I feel that it’s best “to do it and do it right”. I also keep a fraction of my total investment in saving bonds so that I know that I have money to fall on in case something major happens to my portfolio.
There are a lot of risks that are taken involving this retirement, and as you said, 4% is not enough at all.
This problem should be solved immediately because many of our senior citizen are depending on their retirement fund. The government should act terrible and faster as they can. And it a good news also that these problem has been brought out early before it became worst.
Interesting analysis. Balancing risk in investments is not a problem specific to retirees, though it's certainly more critical in that case. Living Simply requires simple solutions, but thse can be fienishly difficult to come by. Unfortunately, the stock market has been very unreliable in recent years -- mostly a trading market for at least months. What to do if you have a finite amount of money and all invested in the stock market?
I would have to agree with this statement: This is an insidious retirement investing problem because the correct solution is counter-intuitive. You must start out saving when you are young so you can retire on time, and be smart about your investments.
I prefer safe investment in bank even it has low interest, because what, there isnt a certain future, all we can do is doing it with low risk
it is really an important decision to invest your retirement fun because it is the saving of your whole life
it is really an important decision to invest your retirement fun because it is the saving of your whole life
It is indeed an important topic. Everyone is supposed to live a happy life after retirement. But, as long as there is health....
It's global problems for many people closed retire.But many ways to solve the problems
I'd go for business investment such as franchising or home business.
Age is only a number, a cipher for the records. A man can't retire his experience. He must use it.
When you retire, think and act as if you were still working; when you're still working, think and act a bit as if you were already retired.
After planning to have a retirement it is really important to invest first so that the income will stay and may have the source of money to buy such personal needs or basic needs.
Retirement planning is a necessary element during peak earnings, normally at 40s and 50s. It keeps retirement life fun and tension free.
IF we had all started investing as soon as we could learn to count we would be able to save up enough for retirement. However, youth is uninterested in the future and we end up suffering for it. I am now nearing 40 and had all my investments wiped out in 2008. But I still lead a happy life. Remember, whatever we do, the final destination is the same.
While it's true that a person's age and net worth are key factors in determining how much/little risk a retirement portfolio should contain, I believe the most important factor is the risk tolerance of the investor.
If the risk profile of the portfolio doesn't match the risk profile of the investor, they are unlikely to stay the course with their retirement plan.
we must ensure that at what place we are investing,so that it remain retrieved our profits.
Thanks for the information.
I had like to create an account with a insurance which includes save life & plan....not quite sure how's the return yet but if u have a bunch of cash, I'll say put them into fixed deposit and just use the interest every month... what do you think?
After planning to have a retirement it is really important to invest first so that the income will stay and may have the source of money to buy such personal needs or basic needs after planning to have a retiremen.
Retirement planning is make your life easy tension free when you are 45 years old. Everybody should to create a life insurance for myself. thanks to author to write this type of important things of human life.
Thanks for sharing this informative post , keep sharing like this !
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Great post thanks for the info!
Great Post....nice concept.It is indeed an important topic. Everyone is supposed to live a happy life after retirement.We are new online bidding service where investors can login and bid on Foreclosure Real Estate Properties in Arizona going to auction every day. Here you are guided for Real estate investment fund foreclosures REO services.
I think a retirement need to have an objective... So before that we need to make some plan about it...
As the Broker of Record for Milestone Silver Realty Ltd. ; I am always interested in what other Real Estate practitioners and those in related industries have to say and what they are doing with their blogs and websites. Retirement issues are of particular importance to me. Just thought I'd let you know that I came across your site and enjoyed the time that I spent there. As we all can appreciate: what we do continues to be “High Paying Hard Work and Low Paying Easy Work” Thanks for posting and thanks for allowing me to comment. Keep up the fine work.