Risk and Retirement Planning
Risk and retirement planning go hand in hand. To have a successful retirement plan you need to understand the risk and how to mitigate its effects. In this article, we will go over the different types of risk, how you can manage risk, and how it factors into your investment choices.
Types of Investment Risk
Investment risk is the probability that you will experience a loss with an investment. There are four subcategories of investment loss that can help you further identify and mitigate risk. These include:
- Market Risk: This refers to the probability that your investment will lose value during a general decline in the stock market. An example of this would be the crash that happened in 2008 when many different investments dropped in price around the same time.
- Interest Rate Risk: Interest rate risk is related to bonds. It is the probability that a change in interest rates will affect the value of your bonds.
- Inflation Risk: This refers to the chance that the value of your investment declines due to the effect of inflation on the value of a dollar. It is important that your gains over the long term exceed the rate of inflation.
- Credit Risk: Those who invest in bonds are exposed to credit risk. This is the chance that a bond issue may become unable to repay the bond debt.
The main factor with risk and retirement planning is learning how to manage risk. They keyway to do this is through portfolio diversification. Diversification refers to spreading your money among several different investment classes. The thought process behind diversification is that if one sector/investment class fails, another may improve or stay the same to help hedge against loss. This usually involves using a variety of investment vehicles, such as stocks, bonds, insurance, and annuities.
If you manage risk properly it can help you to reach your goals. It is important to find a balance between the savings you want and the risk you are willing to take. Part of finding that balance is determining your time horizon. If you have a longer time horizon for your retirement plan you can take on more risk. This is the case because you have a longer time period to ride out turbulence in the market. You also need to make sure that your portfolio growth outpaces inflation. On the other hand, if you have a short time horizon you will want to take on less risk since you have less time to recoup losses.
Managing Your Risk and Retirement Planning
It is possible to manage your risk and retirement planning. The best way to do this is by meeting with a qualified investment advisor. They can help you to determine your risk tolerance and work that into a plan that will help you have a successful retirement.
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