Personal Finance After 50 For Dummies. Eric Tyson
work: Working part time, especially when you have more flexibility in setting your hours, can be an excellent part of a retirement plan. It can provide enjoyments and a challenge — not to mention some extra dough. Check out Chapter 18 for more on continuing to work during retirement.
Volunteering: Giving something back to society pays many dividends. You can find a zillion volunteer opportunities. Your place of worship, organizations that support a cause you believe in (for example, fighting cancer or heart disease), and schools are super places to start looking. Stumped for ideas? Try a service like VolunteerMatch (www.volunteermatch.org).
Chapter 4
Identifying Retirement Investments and Strategies
IN THIS CHAPTER
Life, at least in a capitalistic economy, is full of choices. And is that ever true when it comes to investments. You have more investments to choose from than you’ll ever have time to research.
As you approach and then enter retirement, making smart decisions is even more important than ever because you’ll likely be living off of your investments. Most folks live on their investment income and eventually tap into some of the investment principal especially later in their retirement years.
In this key chapter, we discuss your best investment options for retirement money and help you understand the differences among investments. We discuss some of our favorite investments for you to consider. And last but not least, we explain how to evaluate, make changes to, and monitor your portfolio.
Defining Investments
As you construct and manage an investment portfolio for your retirement, you must consider numerous factors. You shouldn’t, for example, simply chase after investments that historically have posted higher rates of return because those investments tend to be riskier, especially in the shorter term. Also, investments differ from one another in their income-producing ability; how they are taxed at the federal, state, and local level; and their sensitivity to inflation, among other factors.
Before we dive into the dimensions on which investments differ from one another, we need to start with something far more basic. We first define what an investment is. An investment is something into which you choose to put your money in the hopes of earning some return and protecting what you’ve invested. All money, therefore, is in some sort of investment, even what’s put in bank accounts, low-return short-term treasury bills, money market funds, and so on.
Understanding risk
When you make investments, even low-return ones, you accept a certain amount of risk. The risk, of course, is that seemingly attractive higher-return-producing investments can and sometimes do decline in value.
After an extended period of good economic times, like the 1990s or 2010s, some people make the mistake of feeling as if their money is wasting away or not “invested” if it’s in low-return, safer-money investments. As a result, they may rush to invest the money elsewhere with the hope of earning a higher return. After periods of extended good economic times, we see more and more conservative folks putting funds they intended to stash away for a rainy day into the stock market to get quick returns. Safe investments were derided with the expression, “Cash is trash.”
Some investments are riskier, which is to say that they fluctuate more in value and can produce greater losses over the short term. That’s why, when you select investments, you need to completely understand what potentially could happen to your money. You should consider two important points when weighing risk:
Risk is fine as long as you understand what you’re getting yourself into. There’s nothing wrong with taking risk. In fact, an investor needs to accept risk in order to have the potential for earning a higher return. Just make sure you’re educated on the options and understand the risks you’re choosing to accept with your choices. You need to protect certain types of funds and take little or no risk with them. For example, your emergency reserve fund (which you can tap for unexpected expenses) money shouldn’t be in an investment subject to great fluctuations in value, such as the stock market. Instead, you should invest this money in someplace stable and accessible, such as a savings account or money market fund or a short-term high-quality bond fund.
Not taking any risk is risky. You want to select those investments that suit your particular goals and your desire and necessity to take risk, in terms of producing sufficient returns to help pay for your retirement. The trick is to carefully balance the return you require against the risk that you may be exposed to in seeking a higher return investment. You need a certain amount of money saved to maintain a desired standard of living during retirement. If the money you’re accumulating is invested too conservatively and grows too slowly, you may need to work many more years or save at a much higher rate before you can afford to retire. That’s why you should do the number crunching for retirement planning that we discuss in Chapter 3.
Eyeing your returns
In order to fully understand investments, you must keep in mind that investments differ from one another in terms of their likely returns. Investment returns generally come in two forms: current income and appreciation. We detail both in the following sections.
Current income
Investments may produce current income, typically in the form of interest or dividends, which are profits distributed to corporate stockholders or bondholders. If, for example, you place your money in a bank certificate of deposit that matures in one year, the bank may pay, say, 1 percent interest. Likewise, if you invest in a bond issued by a company, which matures in five years, you may be paid 2 percent interest.
THE 2000S WAKE-UP CALL ABOUT RISK
The 2000s was a decade that contained several wake-up calls for investors concerning risk. The 1990s was one of the best ever for U.S. stock market investors, especially those who loaded up on technology and Internet stocks. So some investors were complacent about the risks in the stock market.
There were two severe bear markets of the 2000s: the first occurring in the early 2000s and the second occurring in the late 2000s. Folks nearing retirement with too large a portion of their portfolios in stocks were shocked to see their retirement plans altered by unexpected events.
The early 2000s bear market punctured the bubble in technology and Internet stocks, which by any reasonable measure were grossly overvalued in the late 1990s. Many investors, however, blindly bought them because the successful companies in this space were growing