How long to invest if I have 10 years before my retirement?
If you have a decade or more before you plan to retire, you’ve got time and it’s important to use it wisely. Believe it or not, your time is just as important (if not more so) than your money.
First determine what your risk tolerance level is.
Then work yourself a few retirement projections to determine what you need to do in order to accomplish your financial goals.
If you think that your investment time frame is short because it only extends to your retirement date, here’s a catch that most people overlook.
In actual fact, you have a lot longer period to invest than you think. For example, let’s say you are 40 years old and you want to retire at 55. Do you have 15 years to invest? NO. You have decades more. That’s because logically, you want your money to keep working even after your retirement date.
What is more, you will actually want your money to keep working as long as you live – at least. That’s the catch; when you think about investing, think about how long you want your money to last for you rather than your retirement date. Indeed, your retirement date isn’t that important when it comes to deciding about investment.
If you are 40 years old today and you want to retire in 15 years, you probably still want that money to work another 25 or more years after you retire. If that’s the case, you have a whopping 40 years investment period, not 15 years.
So your first step is to be crystal clear on what you want your money to do for you and for how long. Once you know the answers to these two questions, plan and invest accordingly. Again, balance your risk against your long-term needs and invest in a way that provides the chance that is greatest of you achieving your goals with the least amount of risk.
Should you plan your investment if you are less than 10 years from retirement
You might think you have to invest very conservatively if you are less than 10 years from retirement. Well,…you might. But think again.
Think about investing from the standpoint of how long you want your money to work for you. Remember just that because when you retire, doesn’t mean you can afford to allow your money to do so. Inflation will eat up your buying power regardless of what you do. That being said, resist the thought to become too conservative.
How to invest if you are retired
Retired people still have long investment time horizons. Focus on your expected longevity and more important the desired longevity of your wealth. I realize that’s not always so easy to do but it is important. The problem here is that when people stop working they often become hyper sensitive to short-term fluctuations.
However, I understand this. It’s natural and becomes more important than ever to protect your wealth since you aren’t generating regular income anymore. But as we’ve discussed, investors who become over-conservatives often risk the long-term objective of their retirement accounts in order to avoid the risk that is short-term. This is a very bad and expensive trade-off.
The solution is to revisit your risk tolerance and test again. Once you do that, re-run your retirement projections as well. Invest using an allocation that exposes you to the amount that is least of risk as long as you still have a high probability of achieving your goals.
How to invest if you are far behind.
People who haven’t saved enough for their retirement are often anxious. They sometimes feel compelled to invest too aggressively. In their minds, they do this in order to “catch up”.
I understand this of course but I would warn you against being too aggressive if you find yourself in this situation. The reason is, people who take on too much risk lose money over the long-run. They get involved with speculative schemes and ventures that are risky.
Remember, even you probably still have a number of years to make up for it even if you are behind. And when we speak about retirement investing, it is by nature a deal that is long-term.
You will take too much unnecessary risk once you speculate. Don’t give in to that impulse. Instead, slow down and take a breath. Revisit your plan and consider adjustments such as delaying retirement, working part-time or spending reductions.
My strong recommendation is not to compromise when it comes to investment strategy. Do not get in over your head or invest aggressively. The odds are definitely not in your favor if you fall into that trap.