Planning for retirement can cause a significant amount of worry. After all, it involves building a nest egg that must financially sustain you in older age.
As such, it makes sense to consider your time horizon, and to invest in assets that are appropriate in terms of being able to deliver on your goals.
Furthermore, choosing your investments carefully can lead to lower risk, as well as higher returns that ultimately provide you with a larger retirement fund.
One of the most important aspects of planning for retirement is determining your time horizon. In other words, working out approximately how long until you plan to stop working. Although this can be a difficult consideration for many people to make, it can impact on the types of assets that you plan to hold.
For example, if you have a long time horizon (perhaps a decade or more) it may be a good idea to consider riskier assets such as shares. They may experience volatility in the short run that can be a cause for concern. But in the long run, and more importantly over your time horizon, they have the potential to produce higher returns than other mainstream assets.
By focusing on your time horizon, you can ensure that your portfolio is invested in the most suitable assets. This can help to pacify concerns about the performance of your portfolio prior to retirement.
While holding cash may have produced a relatively solid income return in the past, low interest rates at the present time mean that its returns may lag inflation over the medium term. As such, investors who are seeking to either build a retirement portfolio, or generate a passive income from a nest egg, may be better off investing their capital elsewhere.
One option could be dividend stocks. They are undervalued in many instances at the present time, and could provide significantly higher total returns than cash that boosts the performance of your portfolio. Likewise, their income return may be higher than cash, which could lead to a higher passive income in older age that helps to allay concerns about your retirement income.
When investing in stocks, it is imperative to focus on the fundamental strength of the companies being purchased. Checking aspects of a business such as its debt levels, cash flow and strategy can lead to higher returns, as well as a lower risk of loss. It may mean that your risk/reward ratio is more appealing, and could help to reduce fears surrounding the performance of your portfolio.
With the world economy currently experiencing an uncertain period, fundamentally-sound shares could gain favour among investors. This may mean that they outperform the wider market, and could improve your retirement prospects. Therefore, taking the time to analyse your potential holdings could be a worthwhile move.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.