We are inundated with information about saving and investing for retirement. And the options are overwhelming: Individual Retirement Account (IRA), Roth IRA, 401(k), Roth 401(k) and more. How much should you contribute, when should you start, how should you invest, when can you access the funds—the list of questions goes on.

Integrate retirement with other financial goals

You should not look at retirement in a vacuum. You need to have a good grasp on your budget so you understand your cash flow. It is also important to weigh your options between investing for retirement and taking care of other financial obligations such as existing debt, establishing an emergency fund and short-term goals. Once you know what you can afford to set aside and the appropriate account type(s), the questions about how to invest need to be tackled.

Consider your time horizon

Your time horizon is the amount of time you have left until you plan to use the money that is invested. This helps determine how well your portfolio can handle the ups and downs of the financial markets. Someone heavily invested in the stock market and planning to retire now is facing different challenges compared to someone who isn’t retiring for another 10 to 15 years.

If you have a longer time horizon, you may be able to invest a greater percentage of your portfolio in asset classes that are more volatile but have a greater potential for long-term growth. Though past performance does not guarantee future results, the long-term direction of the stock market has historically been positive despite frequent and large fluctuations.

Having a longer time horizon also allows you take advantage of the effects of compounding—one of the most powerful tools for an investor. Below highlights the power of compounding with a few basic examples of what investing $1,000 at different ages will be by age 65, assuming a 5% annual return:

• Age 20: $1,000 = $8,985  
• Age 30: $1,000 = $5,516  
• Age 40: $1,000 = $3,386

Even if you are at retirement’s doorstep now, you still need to keep some money invested for the longer term. Chances are you will have 20 to 30 years of retirement, so all of your investments will not be used within the first few years.

Don’t put all of your eggs in one basket

Diversification is one of the most important factors to manage the ups and downs of a portfolio since different types of assets face different types of risk. When most people think of risk, they think of market risk—the possibility that an investment will lose value. However, there are many other types of risk to consider. Bonds face credit or default risk, which involves the bond issuer being unable to meet its obligations to repay the principal borrowed. Bonds also face interest rate risk, or the danger that interest rates will rise and the bond you purchased will pay a lower rate than what is now offered in the market. Investing your money in several types of investments, such as stocks, bonds and other alternatives allows you to spread out and manage the overall risk within a portfolio.

Remember, there are many ways to mitigate and manage risk in a portfolio. Understanding the potential liabilities and rewards of each of your investments and their role in your portfolio may help gauge your emotional risk tolerance more accurately. Also, investing regularly reduces the chance that you invest a large lump sum of money right before a market downturn. This is why regular investing when you have a steady income helps to spread this risk over time.

Remember to account for inflation

Inflation affects much more than the price of commodities like gas, groceries and electric. One of the ways that is less obvious is the overall effect it can have on your investment portfolio. For example, if your portfolio is growing by 4% per year and inflation is at the historical average of 3%, this means that your investments are only earning 1% each year. In terms of strategy, this suggests that you may need to contribute more to your retirement plan than you may think. At a 3% inflation rate, something that costs $100 today will cost $181 in the future—meaning you may need a bigger nest egg than initially expected.

The bottom line

In the long run, it’s not so much about how you specifically invested, it’s about the fact that you did. Understanding your options, evaluating your priorities, diversification and taking action are the keys to securing your financial future.

The experienced team at Busey Wealth Management is here to help you plan for today and the years to come. To learn more about our comprehensive services or find an advisor near you, visit busey.com/wealth-management.

This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.

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