Although the prospect of saving enough money to live comfortably in retirement may seem daunting to young investors, there are steps they can take to mitigate the various risks that could threaten their plans.
Young investors who are planning for their retirement are coping with an environment of global economic uncertainty, volatile equity markets, the decline of traditional corporate pension offerings and various other pressures. People who have already begun saving could be discouraged if their investment portfolio plummeted in value during the financial crisis or the years after. Another concern is that as healthcare improves, people are living longer.
Inflation is important
People who are planning for their retirement need to keep in mind that if they plan to live off their accumulated wealth for anything approaching 20 or 30 years, the inflation that happens during that period could undermine the purchasing power of whatever principal they have remaining.
Fortunately there are various methods that young investors can use to overcome inflation, including a wide range of investment strategies and also the purchase of specific assets that appreciate at a rate higher than the current consumer price index.
Fees are important
Another important factor that should be considered when constructing retirement plans is fees. Working with certain advisors can result in fees, and using certain financial instruments can mean having fees. If a person purchases a mutual fund that generates an annual 8 percent return and that security has annual fees that average 1.5 percent, that fund is only generating 6.5 percent per year after fees. When evaluating investments it is important to find out what the fees are along with key metrics such as annual return.
One strategy that young investors can utilize when creating their retirement plan is diversification. This technique involves combining assets that move together in price as little as possible. There are many ways to diversify one's investment, but it is important to note that this strategy is more difficult to execute in bear markets.
During the financial crisis and the bear market that came afterwards, wide selloffs in assets pushed the value of many assets down simultaneously, which caused these different investments to move together more closely. Another way of putting it is that these assets had higher correlations. One way to overcome high asset correlations is to engage in long-term financial planning and wait out the conditions of bear markets.