Does Your IRA Match Your Personality?
Planning your retirement is an overwhelming task. Will you have enough money? Where will your income come from after you stop working?
How will you know you’ve invested wisely so you can retire someday? These common questions are solved with one answer: open up an Individual Retirement Account.
IRAs are investment vehicles that you open individually rather than through your employer. They allow you to set aside money for retirement that can be tax deferred or not, depending on your situation. You have complete control over how your money is invested, unlike an employer’s retirement plan.
IRAs are basically mutual funds that have certain tax advantages because you promise not to withdraw the money until you hit retirement age. The mutual funds are a mix of stocks and bonds and it’s the proportions of these stocks and bonds that changes as you get closer to retirement.
What’s My Personality Go to Do With It?
The mix of stocks and bonds also depends on your personality. How do you react when the stock market takes a dip? Can you handle what’s called volatility in the market? If you see a downswing in stock prices do you immediately need to sell your investments?
How you answer these questions determines how much of your retirement investment portfolio is stocks and how much of it will be bonds. People who can’t handle volatility should have more bonds. If you want to sell the minute prices go down, you shouldn’t have risky assets in your portfolio.
If, on the other hand, you can handle risk in your investments, either because you have other retirement funds besides your IRA or because your investment personality can handle ups and downs, then you can put some riskier stocks into the mix.
How Stable is Your Income?
A relatively stable income means you can invest in riskier stocks and still have something to invest if they fail. More stability in your income means you can allow for more risk in your retirement fund. I you are confident about your income and you’re also confident you’ll be bringing in a good salary ten or even twenty years from now, it might be worth it to inject some risk into your investing strategies. The reward is very tempting, and you can more easily recover from any risk you might incur.
So What’s the Bottom Line?
The single most important factor in deciding how to set up your IRA is your time frame. If you have more than ten years until you retire, you can put more stocks into your mix. If you don’t have much time, stick with bonds so you don’t potentially lose it all.
Second most important factor is your tolerance for risk. That’s what we call your investment personality. If it’s high and you have lots of time before retirement, then go for some of the more riskier stocks suggested by your IRA manager. If it’s low but you have lots of time, then put a few riskier stocks in there but don’t go full force into all risky stocks.
Belinda Mills writes about personal finance, taxes, and green living. Check out some of her work at www.irs-website.org