Once your credit cards are all paid off, your “emergency savings account” is fully funded to a level you are comfortable with, and you are living on a written monthly spending plan (budget), you should be pleasantly surprised at how much money you now have available at the end of each month!
With that extra money available at the end of each month, it’s now time to start planning a retirement strategy.
A very important first step you should take as you begin thinking about your retirement plans is to personally access what kind of investor you are from an emotional perspective. In other words, matching your investment risk tolerance to your personality when it comes to money issues.
Your risk tolerance is your level of comfort with the ups and downs of investing. In order to make the best investment for you as an individual, you will want to find assets that match your risk tolerance.
Low Risk Tolerance
Are you going to lose sleep whenever your assets decline in value? If so, your tolerance is low. Investments that match your risk tolerance profile include basic savings accounts, money market accounts and certificates of deposit.
Today, these types of accounts will generate returns in the range of 1%-3% annually. Using the Rule of 72 which says: 72 divided by the rate of return = the number of years it will take for your money to double one time.
Assuming your best rate of return at 3%: 72/3 = 24 years for your stash to double one time! Unfortunately, a very costly and impossible retirement strategy, unless you have a BIG bucket of money to start with earning interest at these rates!
Medium Risk Tolerance
If you don’t sweat small declines, but do stress over the big ones, your tolerance is medium. Investments that match this risk tolerance profile include stocks of large, established, financially healthy companies and mutual funds that balance stock and bond holdings.
Investments in this category might average 4%-8% annually. Assuming your best rate of return at 8%: 72/8 = 9 years for your stash to double one time! Not too bad if you’ve got a lot of years left before retiring!
High Risk Tolerance
Those with a high tolerance aren’t bothered by market swings as they are only concerned with long-term gains. Those with a high risk tolerance will likely find their investment matches in sophisticated, higher-risk investments and stocks of hi-tech and startup companies.
Investments in this category might average 9%-12%, more or less, annually. Assuming your best rate of return at 12%: 72/12 = 6 years for your stash to double one time! Now we’re getting someplace!
Adjust Investments as Risk Tolerance Changes
Your risk tolerance will change as your investment goals, financial situation and life experiences evolve. Generally, the longer the length of time until you need your money, the more risk you can afford to take. In order to make the best investment, consider where you are in life right now.
Risk tolerance is highest for investments you have chosen to meet faraway goals, such as retirement, because your investments have more time to potentially recover from drops in value.
Conversely, tolerance is lowest for investments to meet short-term goals, such as saving up for educational costs, vacations and other instances where you will need the money sooner. Especially if your retirement year is approaching fast!
In his book, Sound Mind Investing, Austin Pryor, founder of Austin Pryor & Associates, shares a great deal of wisdom on retirement planning and investment strategies.
You can download Pryor’s special report HERE.
Unless you’re a financial wizard and love doing stock market research on what’s hot and what’s not, it’s best to get professional advice from a Certified Financial Planner and/or someone you feel extremely comfortable entrusting your hard earned money to.
You can learn to do your own investing but you also have to be willing to invest the time learning more before you dive in on your own!
I just finished reading a book I wish I would have read 30 years ago! Rule #1, written by Phil Town, is an excellent book for those who want to learn more, in one book, about personal investing and taking matters into your own hands.
It’s not for everyone, but I personally am going to work at incorporating his strategy into our own retirement program.
Well, I hope this discussion on debt-free living and financial freedom over the last several weeks has given you some fresh incentive to make some life-changing decisions with your finances.
Don’t let current circumstances overwhelm you! Start today and take baby steps. If you do, I promise you will be pleasantly surprised where you’ll be with your financial situation come this time next year!
See you next week for more Wisdom Matters!