To Be Truly Safe, Know Your Risks
Thinking about your life in retirement and how much money you'll need and how to get there can be overwhelming. In preparing your plan, it's helpful to think of specific risks and then address each one individually. There is the risk that you will live longer than expected (buy an immediate annuity for lifetime income), that inflation will surge (buy Treasury Inflation Protection Securities, or TIPS), that the dollar will plunge (hold some foreign stocks and bonds), that the market will crash or one sector will vastly outperform another (stay broadly diversified), that you'll pass away prematurely (buy term life insurance) or that your later years will be filled with debilitating health care bills (invest in long-term-care insurance). Breaking down your worries into smaller components makes the job more manageable and pretty much guarantees that you'll end up well positioned for the long run. To keep things really simple, above all, make sure you stay invested, keep adding new money and stay diversified. AARP recently looked at seven distinct mutual-fund categories ranging from small stocks to international stocks to real estate over the past 10 years and found that while a balanced approach would not have avoided losses in the worst years, it would have smoothed out overall returns enough to keep most investors in the game.