Navigating the road to financial security can feel like a labyrinth of complex investment decisions, especially if you’re approaching retirement. It is fraught with questions about risk, returns, taxes, and timing, and the path you take can significantly impact your future.
To help demystify the process, we review the top 10 investment questions investors need to ask before and after making an investment.
Before Investing, Ask Yourself . . .
#1 What are my financial and retirement goals?
Before anything else, identify your objectives. What are you hoping to achieve by investing? In retirement, what kind of life do you envision for yourself? Do you want to live more luxuriously or maintain your current lifestyle? These answers will guide your investment strategy and help you understand which investments are the best for your needs.
#2 What is my risk tolerance?
Risk tolerance is the level of risk you’re willing and able to take on when making an investment. The higher the tolerance, the more you’re willing and able to experience losses in exchange for greater potential returns. When it comes to investing for retirement (and in general), knowing your tolerance level is crucial as it directly impacts the growth of your retirement funds. Investors nearing retirement, for example, usually don’t have much leeway to recover from big losses, so they may lean toward safer investments.
#3 What are the best assets to invest in to reach my goals?
Once you understand your financial goals, as well as your risk tolerance and investment timeline, you can begin looking at your investment options. Stocks, for example, may be suitable for long-term growth and building your retirement nest egg, while bonds can provide a steady income. Real estate, commodities, and mutual funds are other options to consider.
#4 What is the appropriate asset allocation for my goals?
Balancing your portfolio across various asset classes helps manage risk and optimize your returns to meet your goals. For example, a more aggressive investor, such as one wanting to ramp up their returns, might invest in more equities than bonds. A conservative investor, on the other hand, will likely choose bonds or money market instruments.
#5 How will investment taxes affect my retirement income?
If you’re not careful, taxes on investment income and withdrawals can quickly eat into your hard-earned retirement savings. These taxes come in many forms, such as long-term capital gains taxes, dividend taxes, and taxes on interest income, and neglecting to account for them can result in an unpleasant surprise when it comes time to file your returns.
#6 What are tax-advantaged investments?
In addition to protecting your wealth, using tax-advantaged investment accounts like IRAs or 401(k)s can help you grow your retirement savings much more efficiently. These accounts can offer tax deductions, tax-free growth, or tax-free withdrawals, boosting the income at your disposal in retirement.
#7 What are the risks of my investments?
All investments come with risks, ranging from stock market volatility and economic downturns to company-specific risks, such as changes in leadership or a decrease in profitability. Evaluating these risks in relation to your risk tolerance is crucial to developing a successful investment strategy.
#8 Do I need a financial advisor?
While you don’t technically need an advisor to purchase investments, the value of professional advice can’t be understated, especially as your wealth grows. An investment advisor can provide personalized advice, help formulate an investment strategy, and even manage your investment portfolio. Their services can be especially beneficial for those that aren’t confident making investment decisions or for investors that tend to react impulsively to sudden market changes.
After Investing, Ask Yourself . . .
#9 Is the return on my investment meeting my expectations?
Investing for retirement isn’t a buy-it-and-leave-it strategy; periodically reviewing your portfolio performance is vital. If your investments aren’t yielding the expected returns, you may need to rethink your strategy in order to meet your retirement income needs. Remember: investing is a long-term game, so avoid reacting hastily to short-term fluctuations.
#10 How have my goals changed? Are my investments still aligned?
Life changes, and so can your financial situation and goals. Regular check-ins ensure your strategy still aligns with your current circumstances and objectives. If significant changes occur, like health issues or changes in marital status, adjustments should be made to keep your retirement plan on track.
There’s no one-size-fits-all answer to these investment questions. That’s why we’re here to offer personalized financial planning advice. Connect with us today and learn more about how we can help you achieve your unique financial goals.
