Five Keys to Investing For Retirement–Landmark Bank

Five Keys to Investing For Retirement

Courtesy Landmark Bank, Texoma LIVING WELL Magazine

Making decisions about your retirement account can seem overwhelming, especially if you feel unsure about your investment knowledge. The following basic rules can help you make smarter choices regardless of whether you have some investing experience or are just getting started. And you don’t have to come up with your investment strategy on your own. Landmark Bank investment professionals have the expertise and hands-on experience to help you develop the financial strategy that’s right for you.

Don’t lose ground to inflation

It’s easy to see how inflation affects gas prices, electric bills and the cost of food; over time, your money buys less and less. But what inflation does to your investments isn’t always as obvious. Let’s say your money is earning 4% and inflation is running between 3% and 4%–the average annual inflation rate over the last 100 years, according to InflationData.com. That means your investments are growing by no more than 1% each year. And that’s not counting any other costs. Even using a tax-deferred retirement account such as a 401(k), you’ll eventually owe taxes on that money. Unless your retirement portfolio keeps pace with inflation, you could actually be losing money without realizing it.

What does that mean for your retirement strategy? First, you’ll probably need to contribute more to your retirement plan than you think. What seems like a healthy sum now will seem smaller and smaller over time; at a 3% annual inflation rate, something that costs $100 today would cost $181 in 20 years. That means you’ll probably need a bigger retirement nest egg than you’ve anticipated. And don’t forget that people are living much longer now than in the past. You might need your retirement savings to last a lot longer than you expect, and inflation is likely to continue increasing prices over that time. Consider increasing your 401(k) contribution each year by at least enough to overcome the effects of inflation.

At 50 years old, your 401(k) plan may allow you to start making so-called “catch-up contributions” of up to $5,500 per year on top of the standard $17,500 annual maximum. You also can contribute $1,000 more to your traditional or Roth IRA than the standard $5,500 annual maximum if you’re 50 or older.

Second, you need to consider investing at least a portion of your retirement plan in investments that can help keep inflation from silently eating away at the purchasing power of your savings. Cash equivalents may be relatively safe, but they are likely to lose purchasing power to inflation over time. Even if you consider yourself a conservative investor, remember that stocks historically have provided higher long-term total returns than cash equivalents or bonds, even though they also involve greater risk of volatility and potential loss.

At Landmark Bank, we have many different portfolio strategies—each with its own mix of stocks, bonds and cash—to help you strike the right investment balance. We’ll tap into these and myriad other resources to help you create an investment strategy specifically for you.

“Virtually every portfolio needs some growth aspect to help it outpace inflation and reduce overall risk,” says Mark Matejka, a Landmark Bank portfolio manager.

Invest based on your time horizon

Your time horizon is investment-speak for the amount of time you have left until you plan to use the money you’re investing. Why is your time horizon important? Because it can affect how well your portfolio can handle the ups and downs of the financial markets. Someone who was planning to retire in 2008 and was heavily invested in the stock market faced different challenges from that year’s financial crisis than someone who was investing for a retirement many years away, because the portfolio of the person nearing retirement had fewer years to recover from the downturn.

If you have a long time horizon, you may be able to invest a greater percentage of your money in something that could experience more dramatic price changes but that might also have greater potential for long-term growth. Though past performance doesn’t guarantee future results, the long-term direction of the stock market historically has been up despite its frequent and sometimes massive fluctuations.

“Investors should remember that they do not need all their money on the day they retire,” Matejka advises. “It has to last their entire retirement, which could be a long time.”

Think long-term for goals that are many years away and invest accordingly. The longer you stay with a diversified portfolio of investments, the more likely you will be able to ride out market downturns and improve your opportunities for gain.

Consider your risk tolerance

Another key factor in your retirement investment decisions is your risk tolerance—basically, how well you can handle a possible investment loss. There are two aspects to risk tolerance. The first is your financial ability to survive a loss. If you expect to need your money soon–for example, if you plan to begin using your retirement savings in the next year or so–you’ll be less able to withstand even a small loss. But if you don’t expect to need your money immediately or have other assets to rely on in an emergency, you may be able to accept higher levels of risk in order to receive higher returns down the road.

The second aspect of risk tolerance is your emotional ability to withstand the possibility of loss. If you’re invested in a way that doesn’t let you sleep at night, consider reducing the amount of risk in your portfolio. Many people think they’re comfortable with risk, only to discover when the market takes a turn for the worse that they’re actually a lot less risk-tolerant than they thought. Often that means they wind up selling in a panic when prices are lowest. Try to be honest about how you might react to a market downturn, and plan accordingly.

Also remember that there are many ways to manage risk. Creating a diversified portfolio will help you reduce your investment risk and have something working for you no matter what the markets are like in the future. Having money deducted from your paycheck and put into your retirement plan helps spread your risk over time. By investing regularly, you reduce the chance of investing a large sum just before the market takes a downturn.

Integrate retirement planning with your other financial goals

Make sure you have an emergency fund so you don’t need to dip into your retirement savings early. Generally, if you withdraw money from your retirement plan before you turn 59½, you’ll owe not only the amount of federal and state income tax on that money, but a 10% federal tax penalty and possibly a state penalty, as well. There are exceptions to the penalty for premature distributions from a 401(k), but a separate emergency fund can help you weather short-term financial emergencies without scaling back your retirement investment.

If you have outstanding debt, you’ll need to weigh the benefits of saving for retirement against those of paying off that debt as soon as possible. If the interest rate you’re paying on your debt is high, you might benefit from paying off at least a part of it first. Before borrowing or making a withdrawal from your workplace savings account, make sure you first investigate other financing options such as loans from banks, credit unions, friends or family. If your employer matches your contributions, don’t forget to factor into your calculations the loss of that matching money if you choose to focus on paying off debt. You’ll be giving up what is essentially free money if you don’t at least contribute enough to get the employer match.

Don’t put all your eggs in one basket

Diversifying your retirement savings across many different types of investments can help you manage the ups and downs of your portfolio. At Landmark Bank, we consider diversification a guiding investment principle: All of our portfolio strategies control risk and maximize returns by diversifying across and within asset categories.

Here’s why. Different types of investments face different types of risk. For example, when most people think of risk, they think of market risk–the possibility that an investment will lose value because of a general decline in financial markets. However, there are many other types of risk. Bonds face default or credit risk, which is the risk that a bond issuer will not be able to pay the interest owed on its bonds or repay the amount borrowed. Bonds also face interest rate risk, because the resale value of a bond generally falls when interest rates rise. International investors may face currency risk if exchange rates between U.S. and foreign currencies affect the value of a foreign investment. Political risk is created by legislative actions—or the lack of them.

These are only a few of the many types of risk. One investment may respond to the same set of circumstances very differently than another, and thus involve different risks. Putting your money into many different securities, as a mutual fund does, is one way to spread your risk. Another is to invest in several different types of investments–for example, stocks, bonds and cash alternatives. Spreading your portfolio over several different types of investments can help you manage the types and level of risk you face.

“Remember to stick to the plan because you need this money to last throughout your retirement years, which could be better than 30 years,” Matejka says. “A disciplined approach and long-term commitment to your retirement savings will pay off in the long run, when you can retire with the resources you need for a comfortable and enjoyable retirement.”

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014 Landmark Bank also contributed to this article