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Risk Investment
How much risk are you willing to accept in return for your stock market investment performance?
Everyone has their own level of investment risk tolerance. Someone who loses everything they have aged 20 has plenty of time to get back on their feet again financially.
Aged 55 or 60, it’s highly unlikely you’ll have enough time to earn back everything you lost. Clearly, risk tolerance decreases with increasing age. Investment advisors usually advocate portfolios heavily weighted towards the stock market for younger investors. As investors age, the proportion of stocks in the investment portfolio is reduced in favor of bonds and certificates of deposit.
Given time, compound interest can achieve remarkable things. If you’d invested $1 on Independence Day 1776 at an interest rate of ten percent it would now be worth over $4.8 billion. If only you had!
The effects of compounding are such that it’s relatively easy to save for retirement if you begin early, but as you get older, you need to save hard.
So what do you do if you’re ten years away from retirement and you haven’t saved as much as a dollar? Should you follow a high risk strategy and chase high returns. Or should you take a low risk strategy with low returns and no risk to your capital?
Since I’m not an investment advisor this isn’t a question I can answer for you. The reason I’m writing this is I’m hoping you’ll read this and take action before you reach the age of 40. If you start investing for your retirement at 45 and get a moderately good return on your money, every week you’ll need to save approximately as much as you intend to spend each week when you retire at 65. So if you’re planning to spend $20,000 a year, you’ll need to save $20,000 a year.
If you start at age 25, you’ll only need to save about $5,000 a year for a retirement income of $20,000. In fact, since your risk tolerance is higher at 25, you can possibly achieve higher returns and end up with a higher pension.