Investing level of Retirement Risk Tolerance
When thinking about how much investment risk you want to take on, you should be practical. Your financial circumstances may justify taking some reasonable chances or ratcheting down your risk profile. You may see opportunities that merit the suspension of your usual threshold on a single-case basis or backing off an investment that might normally attract you.
If you’re not sure what your level of retirement risk tolerance is, then ask yourself the following questions:
- Do you anticipate your income over the coming years will grow considerably, or will it grow only moderately? This is difficult to predict and involves many factors, including how hard you work. But, if compensation in your profession usually heads considerably upward and you’re on a good track, then you may want to raise your risk threshold.
- Do you have worries about the stock market? Stocks statistically outperform other forms of investment over time, and there are ways to invest in them that carry a low risk of big losses, including mutual and exchange-traded funds that tie to bonds, precious metals or companies from steady, albeit slow-growth, companies. That said, there are many other investment options outside of equities, and those can create big returns.
- What type of lifestyle do you want? If you want to have a big family, new cars and a large house, then you’ll need to reconcile these expenditures with your retirement goals. That may require ensuring what retirement investments you make are on the more cautious side. If material items are of lesser importance, then you might consider a wider range of investments.
- At what age do you hope to retire, and what’s your idea of retirement bliss? This question leads to several more specific ones. Are you looking to retire young? Do you envision staying in the same home with the same expenses you had when you were working, or would you be happy downsizing to lower your living expenses? Do you dream of traveling when you retire? Do you see yourself moving to a small town? Do you want to ensure that you have enough money to meet potential healthcare needs, including the potential hiring of an aide later in life? Your answers will help determine your perspective to certain investments and your overall retirement strategy. That includes how much money you aim to put away and how soon you’ll want it available.