You’ve Decided to Save for Retirement this Year, What’s Next?
Many people ring in the new year with a resolution to make themselves better. Whether that is hitting the gym, getting that promotion at work, or placing an emphasis on spending more time with your family, outlining the steps needed to accomplish those goals are key to being successful. This year OakBridge Asset Management wants to help you with your retirement goal. Planning for retirement can often be daunting and easy to put off for another year. By having a road map to get you there you will have less anxiety and more confidence in your retirement.
There are 3 major factors to consider when putting together and understanding your savings plan. The first is your savings goal (how much you will need at retirement to maintain your current lifestyle). The second is your time horizon, (the amount of time left before you would like to retire), and the third your risk tolerance (the amount of risk you are comfortable with in order to achieve retirement). This post will help you understand these key factors making your retirement seem less daunting.
The first step in creating a retirement plan is to estimate your savings goal. This is a step often left to the old philosophy of “winging it”. Taking into account life expectancy and inflation can really help take some of the guesswork out of this number making you a lot more confident in your retirement plan. This number will help you to reverse engineer the other two key factors in saving for retirement.
The second key point to saving for retirement is understanding your risk/reward. Knowing how much risk you are comfortable with will be key to understanding how much you will need to put aside each month to achieve a comfortable retirement. Typically the higher the risk an investment has, the higher the potential gain is. Higher risk investments typically require a long term investment and are subject to the risk of higher loss. This brings us to our next key point which is the amount of time that you have before your expected retirement date.
How much time do you have until retirement? A longer time to retirement will provide you with more time to ride the ups and downs of the market allowing you to take more risk with your portfolio. On the other side, a shorter time to retirement will not give you as much time to recover from potential losses in a riskier portfolio. Knowing when you need the money can help you be successful not only in putting money away, but also determining the risk tolerance of your portfolio.
Savings goal, risk tolerance and time horizon are all interconnected. The less risk you are willing to take means more money you will need to put away each month to meet your savings goal. The more risk you are willing to take, the more time your will need in your portfolio to ride the market bumps, but allows you to put away less each month to meet your savings goal. These three factors have a give-take relationship and balancing them to meet your needs is key to having a successful nest egg at retirement. While there are no guarantees with investments, knowing your savings goal, risk tolerance, and time horizon you can help increase your chances at a successful retirement.