This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
As far as jobs go, mine is pretty great. It's flexible enough to work around my other commitments, and I get to help others learn important money management skills. But even so, I look forward to that day, decades from now, when I can leave the workforce and devote more of my attention to my hobbies.
I'm OK taking my time to get there because I want to make sure that when I do retire, I can afford to live comfortably. That mindset leaves me unwilling to take the following three risks with my money.
1. Making risky investments
Investing in penny stocks or meme stocks carries a small chance of becoming a multimillionaire quickly, but the odds of losing money are much greater. They're extremely volatile, and buying and selling at the right times to turn a profit are more a matter of luck than skill. Technically, all investments carry some risk of loss, but when you invest in strong, established companies, there's a greater chance your portfolio will do well over time.
I prefer to spread my money between many stocks to reduce my risk of loss. An index fund is a great way to do this. It gives you instant ownership in hundreds of companies in several industries. And it's usually pretty affordable too. Most index funds only charge you a few cents to a few dollars per year to own them.
2. Keeping all my money in stocks
Stocks are considered riskier than some other investments, like bonds. But they also offer greater growth potential over the long term. Since I'm fairly young, I'm happy to accept this additional risk in the hope it will lead to larger returns down the road. But I also recognize the risk of keeping all my money in stocks, especially as I age.
As your nest egg grows, it's wise to move some of your money out of stocks and into bonds over time to protect what you have. This can help reduce your risk of significant losses on the eve of retirement. But you don't want to make this move too quickly or you could hamper your savings' growth.
A good rule of thumb is to keep 110 minus your age in stocks. So for a 40-year-old, that'd be 70% in stocks and 30% in bonds. And you keep adjusting your asset allocation a little at a time, until you reach 60% in stocks and 40% in bonds at 50 years old.
3. Underestimating my retirement needs
While many expect they'll need as much as $3 million to retire comfortably, others think they'll need $250,000 or less. I prefer to err on the side of the former group because I don't want to make the mistake of underestimating my expenses. If I drain my retirement savings too early, I may have to come out of retirement or give up some of the things I enjoy in order to pay my bills.
One simple strategy you can use to estimate your retirement costs is to save 25 times your annual expenses. This is supposed to help your money last at least 30 years. But your results may vary. You could also try using a retirement calculator and your own estimates of your annual retirement expenses to determine how much you should save.
It's OK to change your retirement plan over time if your lifestyle or financial situation changes. But don't let this uncertainty stop you from developing a savings strategy right now. Having a plan can help you stay accountable, and it can bring you some peace of mind as well.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
