Education

The What, Why, and How of Investing

Here we offer simple, practical responses to some of the most commonly asked questions about investing and retirement.

Investing

The price of a security goes up and down based on supply and demand pressures from investors. Volatility measures how much a security’s price moves.

Market volatility tends to occur when something unexpected happens. In this case, the coronavirus (COVID-19) and its impact is creating uncertainty in the markets, leading to fluctuations. Though it can be nerve-wracking for investors, volatility is actually a normal part of investing and has both positives and negatives. On one hand, extreme volatility can lead investors to make short-term decisions that are out of sync with their long-term investment goals. On the other hand, volatility can create potential opportunities for seasoned investment managers.

Extreme market volatility and market downturns are inevitable – but markets have bounced back from crises in the past. Remember you’re invested for the long term: Resist the temptation to invest based on how you’re feeling at the moment, and focus on your long-term goals.

Diversification is an investment strategy that helps mitigate risk by investing a portfolio across different asset classes. In this way, if any single investment or asset class does badly others might compensate by performing well, potentially smoothing returns overall.

Most individuals are investing for more than one goal. These can include more immediate goals such as generating income to supplement earnings and longer-term goals such as accumulating assets for retirement. A professional financial advisor can be helpful in balancing these goals and selecting appropriate investments to pursue both.

Investing can help individuals reach their financial goals such as increasing their wealth (called capital appreciation), generating income or protecting their money (capital preservation).

Investing is the act of committing money now with the goal of receiving more money in the future.

An individual will need to identify their investment goal (what you need the money for), their investment timeframe (how long until you need the money)and their risk tolerance. With that information the investor (and their advisor if they have one) can develop an investment plan.

An investment portfolio is a collection of investments. An investor can buy a single security (for example a stock or a bond) or they can hold numerous securities in a portfolio.

Investors interested in growing their assets are pursuing a capital appreciation strategy. Capital appreciation is an increase in the price or valueof an investment. Stocks have historically provided the best opportunity for capital appreciation over time, but bonds can also offer appreciation potential. There are no guarantees that the value of stock or bond investments will appreciate and in fact they can lose value.

An investor who starts early and invests consistently can accumulate more assets. In addition, the longer time frame allows an investor to ride out volatility and to realize the benefits of compounding interest.

It is impossible to accurately predict future returns. Over the last 20 years, stocks (as measured by the S&P 500 Index) returned an average of 7.72% per year and bonds (as measured by the Bloomberg Barclays U.S. Aggregate Bond Index) returned an average of 4.63% per year.* It is important to note that past performance is no guarantee of future results. *As of 31 August 2018.

People are living longer, meaning many individuals will spend decades in retirement. Financing those years will require a great deal of money. The sooner an individual starts investing for retirement the better, especially if the investments can be done within a retirement account (such as an IRA or a 401(k)). There are restrictions, but many contributions to a retirement account are tax deferred until they are withdrawn in retirement.

Investing For Retirement

Retirement investing is investing money with the goal of accumulating a set amount, by a set date, to provide a source of income during retirement.

Allocation decisions will depend to some extent on the options available through a retirement account. In general, younger investors will want to adopt a more aggressive approach to growing their assets, as they have time to ride out market fluctuations. Older investors may want to get increasingly conservative as they approach retirement.

Market conditions change. Security prices go up and down. Investors may be tempted to try and time when to buy and sell investments, but history shows that creating a retirement investment plan and sticking with it is most often a smarter strategy.

A retirement plan is an approach to managing investments into and through retirement. The goal is to ensure that the retiree will have and maintain sufficient funds in order to be able to maintain his or her quality of life throughout retirement. Retirement plans often include accounts that are designed specifically for saving and investing for retirement such as an individual retirement account (IRA)) and employer-sponsored accounts (such as a 401(k)).

Everyone’s retirement investment goals will be different, based on their expected retirement age, their health, their life expectancy and their desired lifestyle in retirement. Retirement can last upwards of 40 years for some. As a result, the required investment pool to support that many years of spending can be quite large.

Investing can help individuals reach long-term, high-cost goals such as funding retirement. Investing offers the potential to increase wealth (called capital appreciation), generate income and protect money (called capital preservation).

An appropriate retirement plan can provide an investor with structure and discipline towards securing a stable financial future and can also allow investors to defer taxes on contributions and investment earnings until the money is withdrawn (which generally occurs after retirement when an investor’s tax bracket is generally lower).

The maximum possible Social Security benefit for someone who retires in 2020 at full retirement age is $3,011 per month. Individuals can calculate their likely benefit by creating an account on the Social Security Administration’s website, SSA.gov.

Make sure the advisor is licensed and that he or she has references. Ask about their investment philosophy, their services, their fee structure and their availability. Beyond that, selecting an advisor should be a very personal process.

Time is a big advantage in investing. An investor who starts early and invests consistently can accumulate more assets. In addition, investing with a longer time frame in mind allows an investor to withstand volatile markets and stay invested, realizing the benefits of compounding interest.

Investing During Retirement

Investors can better manage portfolio volatility by focusing on securities that are inherently less volatile (such as certain types of bonds) and diversifying money across investments. However, these tactics will not wholly eliminate volatility.

Individuals may be tempted to stop planning and investing after reaching retirement, but investing can still play a valuable role in generating income, keeping pace with rising costs, and protecting and growing assets to support them throughout their golden years.

Investing during retirement is an effort to successfully manage retirement savings to provide a reliable stream of income, capital appreciation to keep pace with inflation, and capital preservation to help retain wealth for future generations.

While it’s impossible to predict an individual’s life expectancy, the U.S. government publishes annual estimates that can be a useful tool for financial planning. According to the Pension Reserving Table, which measures life expectancy at age 65, men will live to 86.6 years, on average, and women to 88.8 years. Calculating rates, individuals who retire at 65 may need their retirement savings to support them for more than 20 years.

The financial markets are increasingly complex. Retired individuals may not have the time or the interest to stay on top of changing conditions and actively manage their portfolio. A professional financial advisor can help to develop custom investment plans, recommend specific strategies, and monitor markets and portfolio performance.

Individuals with a pension plan, 401(k) plan or other employer-sponsored plan may be given a choice upon retiring to either take a one-time lump-sum payment or receive a monthly payment. Individuals may want to consult with a financial advisor when considering this decision.

An individual or couple’s annual income needs will vary according to their lifestyle. The best place to start when estimating future needs is to look at expenses during working years. While some people will spend less during retirement, others may actually spend more as they have time to indulge in travel and other activities.

Diversification is an investment strategy that helps mitigate risk by investing across a variety of opportunities. If any single investment or asset class does badly, others in different areas might compensate by performing well, potentially smoothing returns overall.

While individuals may retire at any age, they cannot access Social Security benefits until age 62. Workers will only receive 100% of their Social Security benefits, however, if they wait until full retirement age, which varies depending on birth year. Individuals can receive higher monthly checks if they delay collecting benefits beyond age 62. _{Source: www.ssa.gov}

Individuals can experience loss of purchasing power from inflation if they don’t continue to grow their asset base and they can potentially live for decades in retirement, potentially giving them some time to tolerate periods of market volatility. Investors should consult with a financial advisor about their unique situation to determine how much growth potential they need.

A drawdown strategy is a plan for withdrawing from your retirement savings in a way that ensures the money will last for as long as you need it to. The strategy must take into consideration desired lifestyle, general expenses, Social Security benefits, investment income potential, tax consequences, other sources of income (such as annuities, pension plans, real estate) and longevity.

Investors interested in protecting their money can pursue a capital preservation strategy. With the goal of maintaining the value of an investment, less risky, low-return potential instruments such as CDs, money market accounts, and interest-bearing bank accounts have, historically, kept their value. Bonds may also be relatively stable investments – but with return potential that may help investors keep pace with inflation.