What three factors should we consider when investing for retirement?
Generally, you should consider your time horizon, risk tolerance and your amount of savings. At Henssler Financial, we approach it from “When do you need the money?” This plays into your risk tolerance. You need to consider if you can get your money back from your investment. It’s not necessarily a question of if the stock will go up or down, but whether you can get your principal back while earning a rate of return that was assumed when you made the initial investment.
Many investors have a disconnect to risk. They want a guaranteed rate of return. You have to define what risk tolerance means to you. It is a gut check, not a questionnaire you fill out. If you panicked in 2008 and sold as the market plummeted, you may need less risk.
This is why we have our Ten Year Rule. Any money you need within the next 10 years should be in fixed-income investments to protect your principal. Any money you do not need in 10 years should be invested in growth investments like stocks. Time will solve most problems. The longer you have to withstand the fluctuations of the market, the better you should be. We use 10 years to avoid selling at the bottom.
If you want to stay safe and invest in municipal bonds, Treasurys or corporate bonds, you have to save considerably more. If you want to spend $60,000 after tax in retirement, you need to consider what inflation will do to that number. In 10 years, after adjusting for 4% inflation, you will need $88,000 a year. In 20 years, you will need $131,000 a year, while in 30 years it will be $194,000 a year.
If you retire at 55, you may easily live to 90. If you were able to get a 10% return for 10 years, you will need a portfolio of $1.1 million. If you are retiring in 20 years, you’ll need $1.7 million, and if you have 30 years to retirement, you’ll need to have a portfolio of $2.5 million. Let’s say you have zero retirement savings. If you were able to get the hypothetical guaranteed 10% return, you’d need to save $72,000 after tax to attain a portfolio of $1.7 million by the time you retire to carry you to age 90. Likewise, if you have 20 years, you’d need to save $30,000 a year and if retirement is 30 years away, you’d have to save $15,000 a year.
These numbers illustrate how important it is to save early and invest aggressively. At 40, you shouldn’t have 40% of your retirement assets in bonds. If this is an IRA, you cannot access the money until you are 59½, so that is 19 years. Bonds have never outperformed other asset classes in 19 years, which is why we recommend stocks or mutual funds that invest in common stocks.
Money hasn’t changed, and neither has compounding interest. Money doubles every 10 years at 7% interest. If you invest $1 today, in 10 years it will be $2. In 20 years, it will be $4. In 30 years it will be $8. In 40 years it will be $16. At 40 you need to save twice as much as you would have to save at age 20 to reach your goals.
At Henssler Financial we believe you should Live Ready, and that includes knowing your risk tolerance and investment time horizons. If you have questions regarding your investment strategy, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at email@example.com.