Will investing now hurt your chances of retiring on time? | Smart Change: Personal Finances
If you follow the news, it’s pretty hard to ignore all the talk about an impending recession. And even if you managed to ignore that, record inflation and plummeting investment portfolios probably caught your eye. It can be stressful for people of all ages, and many worry about how it will affect their ability to retire when they want to.
Nobody likes to lose money, so it’s a natural instinct to want to take your money out of the market right now. But that could be a huge mistake.
Focus on the big picture
It’s important not to make rash decisions with your retirement savings right now, as they could have significant consequences. Selling investments that have fallen to prevent them from sinking further could turn a temporary loss into a permanent one. Whereas if you had kept your investments, they might have recovered over time.
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If you take the most drastic step of completely withdrawing your money from your retirement account to keep it in cash, you could face costly tax penalties today. You also make it much more difficult to save for retirement in the future.
It is almost impossible for most people to save as much as they need for retirement themselves. They need investment income to support them, and they can only get it by investing. Your past contributions actually matter the most, as they are usually the ones that generate the most income over time. When you start later, you will have to rely more on your personal contributions.
The stock market has its ups and downs, but over the long term, it does pretty well. You might think it’s a bad thing to invest more when stock prices are falling, but it may actually be a smart move. You’ll get more stocks from an equity fund or an index fund than you would when times are good and prices are higher, and when the market rallies, those stocks could earn you a good profit.
But don’t ignore the obvious problems
For most people, the best thing to do in a recession is to stay the course. Trust that you’ve made smart investments, and don’t check your portfolio too often if you think it will cause you to make emotional decisions. But there are situations when it makes sense to take a hard look at your portfolio.
If all your money is in a handful of stocks, for example, that’s a major red flag. If one of them hurts, it will have a much bigger effect on your portfolio than if you had hundreds of stocks and a few of them fell. At a minimum, split your money equally between 25 different stocks.
You may also want to make changes if all of your investments are in the same industry, such as technology companies. When this industry is down, your portfolio could be hit hard, even if you own dozens of different stocks within the industry.
Also consider your risk tolerance. If you’ve got all your money in stocks and you’re about to retire, you’re right to be concerned. A general rule of thumb for managing your stock exposure is to keep 110% of your money invested minus your age invested in stocks. So if you are 40 years old, you would have invested 70% in stocks and the rest in bonds. If you are 50, you would have 60% equity, and so on.
But once you have a wallet you’re comfortable with, take a step back and don’t worry too much about daily ups and downs. Unless you plan to retire very soon, this shouldn’t affect you in the long run anyway. Recessions and periods of economic uncertainty have happened many times in the past. People have still managed to successfully invest through them and retire comfortably, and you can too.
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