How to Invest Your Retirement Savings

Whether you have a Roth IRA, a traditional IRA, 401(k) – or any combination of retirement savings accounts – one of the most important things you need to do is to learn how to invest your retirement savings.

Unless you’re a financial professional (or make investing your hobby), it’s a challenge to read through all the fund information, choose those that best fit your current – and future – needs, and then determine your retirement saving asset allocation mix. Following are some tips to help you navigate the retirement savings investment waters.

Understand Your Retirement Savings Risk

There are three types of risk that you need to consider when investing for your retirement savings portfolio. They are:

  • Market risk – This reflects the daily rollercoaster ride of stock and bond values.
  • Interest-rate risk – Interest rates have a direct effect on industries and governments’ cost of borrowing money. Fluctuations in interest rates can impact the value of the bonds these organizations issue.
  • Inflation risk – Inflation can slowly eat away at your retirement savings. If your investment returns are lower than the rate of inflation, then you’re losing value on your retirement money.

Review Your Fund Investment Options

If you’re deciding on IRA investments, learn about what investment options your IRA custodian allows. For example, you are not permitted by law to invest in collectibles such as artwork, rugs, antiques, gems and metals. Additionally, many IRA trustees do not permit IRA owners to invest in real estate.

Furthermore, when you enroll in an IRA or your employer’s 401(k), you have a specific number of investments from which to choose. While some 401(k) plans only give the basics, other plans offer more complex options, including company stock. Your goal is to choose a well-balanced combination of investments.

Understand Retirement Savings Diversification

At any given time, some of your investments may be up while the others may be down, which is where the saying “don’t put all your eggs in one basket” begins to have real meaning. Instead of investing your retirement savings in one class of funds, you need to spread your risk between a number of different funds so that when some investments decline in value, others are increasing.

Practice Asset Allocation

The best place to look for diversification is in a mutual fund. The purpose of a mutual fund is to make money by investing in stocks, bonds, cash or a combination of the three.

Here are some of the most common fund categories:

  • Growth funds – Growth funds invest primarily in the stocks of companies that have the potential for above-average gains. These stock prices tend to be the most volatile.
  • Growth-and-income funds – The companies in these funds pay dividends, as well as invest in bonds. They’re generally less risky than growth funds since the dividend and bond income interest helps ride out the market volatility.
  • Equity-income funds – These funds emphasize income which can soften the impact of a downturn in the stock market.
  • Balanced funds – These are the best of both worlds. They often produce more income than growth funds, which in a stock market downturn can increase returns. But they may also realize lower returns than growth funds when the stock market is on an upswing.
  • Bond funds – These funds provide regular interest income from the bonds they hold. While they tend to produce lower returns than growth funds in bull market years, they can help investors ride out the bear markets.

Determining Your Retirement Savings Investments

Your retirement savings plan is unique, and the investments you choose will depend on your age and risk tolerance. When planning for your retirement it’s important to not overlook spending possibly 20 to 30 years in retirement. Most people will need their investments to grow even after retirement. This means investing too conservatively can leave you with less than you need, just as investing in higher risk funds can deplete your savings.