Often when people are planning for retirement, they think about their savings, how they are going to deal with the family homestead, or where they plan to travel. However, people sometimes struggle to grasp the importance of investing their pension money wisely during their working years and how fundamental it is for retirement.
So, what should you think about when investing your pension money? Well, most of it comes down to the basic investment principles which involve your time horizon and risk tolerance.
Understanding your time horizon is essential, as it highlights how much time there is between now and when you reach the age of retirement. The distance between those two is not important but how you invest your pension funds in that time frame is. For example, if you only have two years until retirement, then your investment strategy should involve growing your pension conservatively in order to minimize the impact of market fluctuations. Alternatively, if you have another twenty years until retirement, then often the investment strategy leans more towards an aggressive approach as market fluctuations are not as important long term as you have the ability to rebound and grow those funds.
Additionally, understanding your risk tolerance is also essential as it is directly linked to your time horizon. Of course, no one ever complains when they are making money but how you feel and react when the market has a downturn does. For most, instinctively when the markets have a wobble the knee-jerk reaction is to sell, and go into something less ’risky’, however without risk there cannot be a potential reward. Let’s face it, money market which is the equivalent to ‘cash savings’ is paying virtually nothing, however, there is little risk associated with money market funds – the less the risk the potential for the lesser reward. Now factor this in, investing into money market funds when you have twenty-plus years until retirement does not make sense, as you have the ability to take more risk and potentially earn better investment returns as you can ride those market movements long term.
The golden rule is as the gap between your working years and retirement years shortens, so should your investment strategy, slowing reducing the risk your pension is strategically moving slowly from more aggressive strategies into more conservative strategies as you reach retirement.
For more information, please call Danielle Pacheco, Pension Sales Advisor at Freisenbruch-Meyer Insurance Services Ltd on +1 (441) 294-4660 or email her at email@example.com
75 Front Street, Hamilton