Where Do You Put Your Retirement Money To Be Safe?

How do you decide where to put your money? Look back at the short-term goals you should have written down earlier. Do you want to take a family vacation or the down payment for a retirement home. Remember, you should always be saving for retirement. But, for goals you want to happen within a year or so it’s best to put your money into one or more of the cash equivalents like a bank account or CD. You’ll earn a little interest and the money will be there when you need it. For goals that are at least 5 years in the future, however, such as retirement, you may want to put some of your money into stocks, bonds, real estate, foreign investments, mutual funds, or other assets. Unlike savings accounts or bank CDs, these types of investments typically are not insured by the federal government. There is the risk that you can lose some of your money. How much risk depends on the type of investment. Generally, the longer you have until retirement and the greater your other sources of income, the more risk you can afford. For those who will be retiring soon and who will depend on their investment for income during their retirement years, a low-risk investment strategy is more prudent. Only you can decide how much risk to take.

Why take any risk at all? Because the greater the risk, the greater the potential reward. By investing carefully in such things as stocks and bonds, you are likely to earn significantly more money than by keeping all of your retirement money in a savings account, for example. The differences in the average annual returns of various types of investments over time is dramatic. Since 1926, the average annual return of short-term U.S. Treasury bills, which roughly equals the return of other cash equivalents such as savings accounts, has been 3.7 percent.

The annual return of long-term government bonds over the same period has been 5.4 percent. Large-company stocks, on the other hand, while riskier in the short term, have averaged an annual return of 10.4 percent. Let’s put that into dollars. If you had invested $1 in Treasury bills in 1926, that $1 would have grown to approximately $18 today. However, inflation, at an annual average of 3 percent, would have eaten $11 of that gain. If the $1 had been invested in government bonds, it would have grown to $62. But invested in large-company stocks, it would have grown to over $2,532. None of these rates of returns is guaranteed in the future, but they clearly show the relationship between risk and potential reward.

Many financial experts feel it is important to save at least a portion of your retirement money in higher risk — but potentially higher returning — assets. These higher risk assets can help you stay ahead of inflation, which eats away at your nest egg over time. Which assets you want to invest in, of course, is your decision. Never invest in anything you don’t thoroughly understand or don’t feel comfortable about.