Consolidating Your Retirement Money – Determine Your Objectives
  1. Consolidating Your Retirement Money – Itemize Your Assets
  2. Consolidating Your Retirement Money – Determine Your Objectives
  3. Consolidating Your Retirement Money – Evaluate Performance
  4. Consolidating Your Retirement Money – Organize Your Assets
  5. Consolidating Your Retirement Money – Plan For The Future

Consolidating Your Retirement Money – Determine Your Objectives

Now that you know what you have – and where it all is – you may think it’s time to start taking action. But to do that, you need a plan. And to plan, you have to know what kind of investor you are and which investment objectives best fit you.

Your Risk Profile

Everyone has a comfort level with how much investment risk to take. The other important factor is how much time you have to make investments grow or to recover from a bad market or investment risk that went wrong.

– Risk tolerance measures how much risk you are willing to take to reach your financial goal. For example, are you willing to invest in something that could go down 20% next year? If so, then you have a high risk tolerance.

– Time horizon simply means how long before your retirement. If you will retire in 20 years, that is your time horizon.

Your Investment Objective(s)

Simply defined, an investment objective is a financial goal that you shape your strategies to achieve. There are four basic types: growth, income, capital preservation and tax reduction. You might focus your investments on one objective or prefer a combination. The way you employ the strategy will be shaped by the type of investor you are and the needs you have. For example, an income investor (see below) with a low tolerance for risk might choose investments at the less-risky end of the spectrum, such as treasury securities.

– Growth is appropriate for long-term and aggressive investors who can ride out the ups and downs in the stock market. Growth comes with the risk of losing principal and typically fits those who seek to fulfill long-term goals, such as saving for retirement or college. Growth investments include common stocks, stock mutual funds and ETFs, and real estate and REITs.

– Income is for those who seek a regular payout from their investments. This objective may or may not risk one's principal, depending on the type of vehicle used. Preferred and utility stocks, corporate and municipal bonds, government-agency securities such as Sallie Mae and Freddie Mac and senior secured loans pay higher income rates with relative price stability, while guaranteed instruments include CDs, treasury securities and savings bonds. Annuities can also provide some degree of guaranteed income by including income benefit riders in the contract.

– Capital preservation means safety. CDs, treasury securities and savings bonds do pay interest, but they are all backed by the full faith and credit of the U.S. government. Fixed and indexed annuities are backed by the cash reserves of the insurance carrier, which is in turn backed by state guaranty funds if it becomes insolvent.

– Tax reduction is fairly self-explanatory. It simply means investing in a way that minimizes the income-tax bill for whatever investment strategy you are using. For example, if you are a growth investor saving for retirement, you can achieve tax reduction by putting your retirement savings inside an IRA or other tax-deferred plan or account. Annuities also provide tax-deferral without having to be placed inside any type of tax-advantaged plan.

Where Do You Fit?

If you are somewhere in midlife, you could be retiring in perhaps 15 to 25 years. This means that your primary investment objective should probably still be growth, rather than income or capital preservation. And the farther away from retirement you are, the more aggressive your portfolio could be, unless you have serious family issues that make this unwise, such as providing for the future of a child with a disability.

Appropriate growth instruments can include stocks, real estate, REITs – or mutual funds or ETFs that invest in these vehicles. Be prepared to experience some ups and downs in your investments. The more risk you take with your investments, though, the greater the reward you can reap from them. Whatever you do, make sure that the majority of your portfolio is growing faster than inflation over time.

Here's where time horizon comes in: Your risk of loss due to falling markets goes way down when your time horizon is 10 years or more. As you get nearer to retirement, you need to start moving some of your holdings into more conservative instruments such as bonds or CDs. If you are a very conservative investor, you might be wise to add an annuity that provides guaranteed income benefits to traditional safe investments such as CDs or treasury securities. Regardless of your risk tolerance or time horizon, be sure that your portfolio is sufficiently diversified.

As you survey your assets and how they might grow, remember to include the cash value of your life insurance, if any; the equity you have in your home; and any pension benefits to which you are entitled, including Social Security. For example, if you will receive $500 per month from a defined-benefit plan, this will reduce the amount of income your portfolio will have to generate when you retire. Result: You can either take slightly less risk with your investments or perhaps retire a bit sooner – or live a little more comfortably.

If you are unsure what your investment objectives should be, don’t hesitate to enlist a financial planner. A professional can tell you which type of strategy you need to pursue to achieve your goals and may be able to help you put your objectives into effect. Of course, bring your spreadsheet or list of assets when you meet with a planner to provide the full picture of where you are.

Consolidating Your Retirement Money – Evaluate Performance

  1. Consolidating Your Retirement Money – Itemize Your Assets
  2. Consolidating Your Retirement Money – Determine Your Objectives
  3. Consolidating Your Retirement Money – Evaluate Performance
  4. Consolidating Your Retirement Money – Organize Your Assets
  5. Consolidating Your Retirement Money – Plan For The Future
  1. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  2. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  3. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  4. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  5. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  6. Mandatory Distribution

    The amount an individual must withdraw from certain types of ...
  1. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  2. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  3. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  4. How can I determine if a longevity annuity is right for me?

    A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
  5. How are variable annuities taxed at death?

    If the owner of a variable annuity dies before receiving full payment, his beneficiary must pay taxes on any earnings received. ... Read Full Answer >>
  6. How does a Roth IRA grow over time?

    Your Roth IRA account grows over time thanks to two funding sources: contributions and earnings. While your contributions ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!