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3: Analyze Your Decisions

Save and Invest Early, Then Keep at It

coin going into piggy bank

It may not always feel like it, but time is on your side. The earlier you can start saving and investing, the more you can reap the benefits of compounding interest. This is what you achieve when the value of your investment (or savings) grows based on its earnings. For example, a CD with interest compounded monthly will give you a greater sum at the end of the investment period than when you started.

This basic compounding principle doesn’t need to stop at retirement. But you will need a plan for spreading your investments around to supply you with your desired returns.

What is Your Target Retirement Savings Rate?

To get an estimate of the savings you will need in retirement, use the Retirement Savings Worksheet from the U.S. Department of Labor (located on the fifth tab). Now think about these questions:

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  1. Are you on track to meet the savings you need in retirement?
  2. If not, what steps can you take to increase your savings or amp up income from your investments? For example, does your company offer auto-enrollment or auto-escalation in retirement savings plans? Or does a local bank offer a savings incentive program? Do you need a spending plan to boost your savings?
  3. Is it realistic to increase your retirement savings? If it means adding to your credit card debt for normal living expenses or borrowing from savings slated for your emergency fund, maybe this isn’t a good goal.

Define Your Retirement Saving and Investment Mix

It’s a good habit to start saving and investing early for retirement, but you also need to save and invest during retirement. Your saving and investment mix needs to reflect your needs for immediate draw downs, emergencies and generating income for your lifetime. Diversifying your savings and investments with an eye to longevity is key. This will not only keep you from outliving your money, but also help you address inflation.

  • Government and corporate bonds give you a blend of safety and higher yields. Treasury inflation-protected securities (TIPS) are government bonds that automatically adjust for increases in inflation.
  • Rental properties provide a source of steady, measured income, but they also can cause headaches such as maintenance, bookkeeping and tax reporting. You need to weigh the income benefits vs. the costs and personal obligations carefully.
  • Cash and short-term forms of savings (e.g., CDs) help you keep emergency funds on hand so you don’t have to sell other investments that are either performing well or losing ground in a down market.
  • Mutual funds or exchange-traded funds let you benefit from skills of a professional money manager and give you more opportunities for diversification in your portfolio.
  • Annuities provide a steady stream of income. Immediate annuities can offer either a fixed or variable lifetime payout option, protecting you from longevity risk.

General guidelines for what to save in each of these basic instruments include:

  • Save up to five years of your living expenses that are not covered by Social Security and/or a pension in safe places such as CDs and money market mutual funds.
  • Invest another five years (years five through 10) of living expenses in bonds or bond mutual funds from both corporations and the federal government.

Then it’s time to add some riskier investments. Use your long-term money (years 11 and beyond) to invest in stocks (both domestic and foreign), real estate and other growth-oriented investments. These are available through mutual funds or exchange-traded funds and provide long-term growth for your retirement savings.

Consider using the services of a retirement professional to help you create a broad mix of investments, spreading your risk over several markets.

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What's Your Risk Tolerance?

What do you know about your tolerance for investing? An important part of planning your savings and investment strategy is understanding how much risk you’re willing to take and which types of risk most worry you. Your risk tolerance is the degree of uncertainty you are willing to take on to achieve potentially greater rewards.

Use this quiz from Rutgers Cooperative Extension to help you determine your risk comfort level.

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