Planning for retirement is like a road trip. It's smart to have a plan, and you can move at any speed you're comfortable with.
But investing for retirement is like driving on a highway: There's a fast lane, a slow lane and a cruising lane in the middle. Depending on your short-term financial needs, your long-term retirement goals and where you are in your career and your retirement planning, you can pick a lane and settle into the retirement strategies that work best for you.
Slow and Steady: Fixed Interest Rate Investments
The so-called slow lane is for safety and easy access, and fixed interest rate investments are similar to traveling in this lane. With fixed investments, you're not trying to get the fastest growth. Your returns might be relatively small, but you're still moving forward, and you can minimize risk with conservative investments.
When you need money, these investments can be an excellent source of funds. Their values are relatively stable compared to investments tied to the stock market. Guaranteed vehicles like annuities can help you avoid market losses altogether. And with government-guaranteed bank accounts, you can spend from your account on demand, though interest rates are typically quite low.
The trade-off of choosing safety and liquidity is that you're unlikely to see big earnings. If you don't need significant growth to reach your goals, this lane could be appropriate. Be careful of inflation, though. You could lose purchasing power if prices rise and your investments don't grow.
Middle of the Road: Indexed Investments
The next lane over might speed up your progress — without putting everything at risk. Indexed investments provide partial exposure to market growth without any of the downside. They also set you up for income down the road.
With indexed investments, you can benefit from stock market gains. But your money isn't invested directly in the markets. Indexed approaches often credit your account with some — but typically not all — market growth. These strategies also usually set a floor on your account value. So if markets fall or remain stagnant, you won't lose money. You might even earn a modest amount of interest.
One trade-off of indexed solutions is that you might not have immediate access to your entire account balance. However, indexed investments usually guarantee retirement income, so they might be suitable when you're developing your retirement strategies. And you can usually defer taking income until you approach the exit ramp to retirement.
You also rarely participate in 100% of the market's growth. That might be an acceptable trade-off, given the lack of risk, but growth-oriented investors might prefer more market exposure.
The Fast Lane: Market-Based Investments
Market-based investments are the investing equivalent of the fast lane. You'll reach your destination quickly if all goes well — but it's riskier to move at such high speeds.
If you're a long-term investor and can take risks with your money, moving money into the market could make sense. As you invest for retirement and pursue growth, you'll experience ups and downs, but the gains ideally offset the losses. If you're fortunate enough to get significant gains, you'll reach your goals earlier than you'd planned.
Retirement strategies with substantial market exposure are often liquid, meaning you can take withdrawals relatively easily. That might make them appealing to people who need that kind of flexibility.
There's risk inherent in the markets, though. You might hope for long-term growth, and, historically, the stock market has yielded higher returns than fixed-income investments. But success isn't guaranteed — and you could experience substantial losses. If you need money when markets are down (or you decide that your nerves can't handle the volatility anymore), market losses can hurt your retirement security.
Choose Your Lane(s)
As you plan for retirement, you need to make smart decisions about investing your money. But unlike actually driving on the highway, you don't need to stay in one lane at a time. It could make sense to employ several strategies when investing for retirement, like keeping some money safe while attempting to grow other assets over the long term.