If you’re saving money for retirement, you most likely have at least some of your money tied up in investments. However, stock markets are volatile: rates fluctuate, companies collapse, and new technologies upend time-tested ideas and products. Any sudden change in rates can drastically impact not only your current net worth but the nest egg you need for a comfortable retirement. That’s why, when you’re saving for retirement, it’s important to plan for some volatility.
Here’s how you can diversify your portfolio and savings to protect yourself against unexpected surprises.
The Bucket Approach
The bucket strategy is a risk-adjusted approach to investing. Note that if you need money for short-term sustenance—say, over the next one to two years—you should place these funds into savings rather than investing it. When you use the bucket strategy, you divide your intended retirement assets into three “buckets” or categories:
Your first bucket
Should be reserved for comparably short-term investments: perhaps up to five years. These should be conservative investments.
Your second bucket
Should look more toward the future: maybe another five to ten years. Since you do not need these assets for short-term sustenance or anticipated relief, you may wish to invest more aggressively. However, since you may still retrieve these assets for later use, you should invest in assets or businesses which are not overly risky.
Your third bucket
Should be for the long-term and invested comparably aggressively, in accordance with your risk tolerance.
The third bucket, then, is the best for stocks that you and your wealth manager agree are the most likely to provide higher long-term returns.
The bucket strategy helps you avoid market crashes by ensuring the money you may need in the immediate future is relatively risk-free. Even if a market crash affects your third bucket—invested in higher-risk assets—these stocks will have more time to stabilize following any period of sudden or prolonged volatility.
Different Income Streams
Ideally, your retirement should never be reliant on a single income stream, such as stocks or Social Security. Instead, you should invest in multiple streams of income, which will pay dividends even if a volatile market affects one or more of your other investments.
A wealth manager can help you arrange and balance your:
- Social Security income
- Expected inheritance, including trust proceedings or interest
- Cash deposits
- Real estate investments
Make a Plan and Stick to It
Wealth management firms like Quraishi Law advise that clients begin planning for retirement as soon as they can. Of course, it’s never too late to start—but once you do, it is important to create a long-term roadmap to success. While markets may stay stable for decades at a time, they are nonetheless inherently volatile. Developing a long-term plan that accounts for contingencies and removes your reliance on a single source of income not only helps you weather hardship but also gives you the discipline to avoid heat-of-the-moment reactions, like pulling an investment in the face of declining share valuations.
Why Diversification Is Important
No matter what your anticipated revenue stream is, retirement planning should be diverse: even if you own substantial shares in a large and profitable corporation or have hundreds of thousands of dollars in cryptocurrency, putting all of your money in one place risks market disruptions that nobody can see coming.
A financial management and wealth planning firm like Quraishi Law & Wealth can help you effectively allocate your assets, working with the money and funds you already have to take you where you want to go.
Unlike other firms, we base our strategy on your risk tolerance, not ours. We understand that managing other people’s money comes with a hefty set of responsibilities, which is why we don’t put your assets in places you wouldn’t feel comfortable putting them yourself.
Contact Us Today
Send Quraishi Law & Wealth a message online today to find out how you can get the most out of your retirement planning.