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 exactly where you want it to go.
I’m thinking the South of France.
See ya there in 2050. 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. Fancy. When that company’s doing well and is on investors’ nice list, you can make money. If not, you could lose some. Since prices go up and down all the time, stocks are considered risky (but possibly 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 at a certain date. Plus interest. Making these relatively safe, assuming the institution stays afloat in the meantime.
It’s a good idea to own both stocks and bonds. Because diversification. When one type of investment is down, the other should be up.
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 info, 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 any bumps in the stock market. In the long run, the market has recovered from every big drop and then some. Remember 2008-2009? US stock prices have more than tripled since then.
If you don’t have a lot of time until retirement...tell us your secrets. But you might want to buy more bonds than stocks to lower your risk.
It’d be cool if there was an easy way to ballpark that breakdown.
Hi, 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, it’s okay to back off the stocks a little bit. But if you’re down for a rollercoaster — or you can avoid obsessively checking how your money’s doing every day — you could invest in even more stocks. Up to you.
No one knows or cares about your money as much as you do. So don’t let someone else choose your own retirement adventure. Think about your timeline and risk tolerance to decide how to invest. Then sit back and let your money do the hard work for you. So one day you won’t have to work at all.