If you want your money to retire in style one day, it’s not enough to sign up for your company’s 401(k) or an IRA. You also have to tell your money where you want it to go.
I’m thinking the South of France.
See ya there in 2060. Telling your money where to go means deciding how you want to invest it. Starting with deciding what percentage of your money should be invested in stocks vs. bonds.
I know the difference between stocks and bonds. I just want to hear you say it.
A stock is a tiny piece of a public company. When you buy a share, you become a partial owner. When that company’s doing well, you could make money, too. If not, you might lose some. Since prices go up and down all the time, stocks are considered risky (but potentially very rewarding) investments. No pain, no gain.
Buying a bond is when you lend money to a gov or company. In exchange, you’ll get an IOU to be paid back – with interest – at a certain date. That makes these relatively safe investments...assuming the institution you gave money to sticks around in the meantime.
It’s a good idea to own both stocks and bonds. Because diversification. When one type of investment is down, others could be up. That helps to lower how much risk you’re taking by investing (vs. parking your money in a savings account).
Got it. And I have to decide how much to invest in stocks and bonds because…
If you don’t, someone else will. Many companies pick default 401(k) investments for people who don’t choose their own. One size might fit some...but definitely not all.
How you invest should depend on personal stats, like your age, when you want to retire, and how much the idea of losing money makes you want to throw up. The pros call that last one your risk tolerance.
Where do I start?
With a timeline. If retirement is still a long way away (sorry), experts say you can generally afford more risk. Aka more stocks than bonds. That’s because you likely have time to ride out the market’s ups and downs. In the long run, the US market has recovered from every big drop. And then some.
If you don’t have a lot of time until retirement...we’re jealous. But you might want to own more bonds than stocks to lower your risk.
It’d be cool if there was an easy way to ballpark that breakdown.
Enter: the Rule of 110. You can get a rough idea of what percentage of your retirement account should be invested in stocks by subtracting your age from 110. The rest should go to bonds. So if you’re 26, you’d invest 84% of your money in stocks and the other 16% in bonds.
Remember this is just a guideline. And your feelings are important. If the idea of losing any money keeps you up at night, you might choose to back off the stocks a little. But if you’re down for a rollercoaster – or you can avoid obsessively checking how your investments are doing – you could invest in even more stocks. Up to you.
No one cares about your money as much as you do. So don’t let someone else choose your retirement adventure. Think about your timeline and risk tolerance to decide how to split up your investment account. Then sit back and let your money do the hard work. So one day you won’t have to work at all.
Want more info about saving for retirement? Get it here.
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