Is Your Retirement Fund Age-Appropriate?
Whether you are just starting out or have been saving for decades, it's important to choose the right kind of IRA for you. An Individual Retirement Account is just that: a retirement account that's tailored for you, your finances and your lifestyle. If you choose the right kind of IRA, your money can continue working for you as you get older. As you age, so should your investment portfolio. This means the mix of funds in your IRA should be examined at least every five years.
What's in the Mix?
By choosing the right mix, what exactly are we talking about? It's simple: stocks and bonds. Most IRAs are combination of stocks and bonds. Stocks are typically riskier and bonds are typically a safer investment product. Stocks may be riskier but they can promise greater reward. Bonds may be safer (i.e. less volatile) but they give predictably lower returns than what stocks can produce.
How Will I Know What Mix is Right for Me?
The single most important factor in determining what kind of retirement fund you should have is your age. IRAs are meant to be grown until you reach retirement age. There is actually a penalty for early withdrawal, not to mention the taxes you'll have to pay on any early distribution. Your retirement age is the target date for your IRA. The further you are away from that target date, the more time you have to save. The general rule of thumb for financial planning is, the more time you have, the riskier you can be with your investments. The theory here is, you will have more time to recover from risky stocks that go sour if you are younger. Older investors won't have the decades that are sometimes required to fully recover form bad stock investments.
Let Your IRA Manager Do the Work For You
As you age, the mix of stocks and bonds in your IRA should change to reflect the level of risk that's age appropriate for you. If you are within five years of retirement, for example, you should have very few stocks in your IRA. It should consist primarily of bonds, which will give a more certain return. There are financial investment companies offering IRAs that change the stock and bond mix for your, as you age. You simply tell them what date you plan to retire and they will automatically adjust the mix for you. This takes most of the guesswork and stress out of setting up and maintaining your IRA. After all, when you're planning for retirement, saving money, and living your life, who has time for managing an IRA as well?