Retirement and Investment Choices

Your investment plan should be tailored to suit your financial circumstances, which are unique. To determine your financial assets and liabilities, you need to create a balance sheet, which lists your assets and your liabilities. The difference between your assets and liabilities is your net worth. By comparing balance sheets you have compiled at different points in time, you can determine whether you have

Accumulated or drown down assets

Paid down or increase liabilities

Increases or decreased your net worth

If you do not have the income or net worth to fund your objectives, you can prioritize your objectives and allocate funding to the most important objectives first. To determine the level of risk that you can assume in your portfolio, you should evaluate your personal circumstances, that is, your marital status, income, and job.

By working through your responses you build a profile that determines your acceptable level of risk, the stage you are at in your financial life cycle, and the size of your portfolio. For example, if you are a single person in your twenties with an MBA degree, no dependents, and growing income, you can absorb far more risk than if you are in your twenties, married, and the sole breadwinner with three small children. Similarly, a widow who depends in the income generated from investment assets cannot assume much risk in the choice of investments as compared with a wealthy 65-year-old who has other sources of income outside of investment assets.

Your age, income, and net worth generally guide the direction of your investment plan. Your age typically determines in which of the following three stages of the financial life cycle you reside:

Accumulation stage: During the early years of your career when your income is rising, you will accumulate investments, mainly in the form of pension and retirement plans. Usually, your debt load increases owing to a mortgage, car loan, or other borrowing. However, in this stage you incur debt to purchase assets, which over time you pay down. The investment emphasis here is on capital growth.

Preservation stage: In this stage your investment assets are growing, and generally, income exceeds expenditures. Here the investment emphasis includes both capital growth and income generation.

Depletion-of-wealth stage: This stage begins with retirement, in which income from pensions, Social Security, and investment replaces your salary. Your priorities in this stage are to make your investment assets last throughout your retirement and to earn enough income to support a comfortable lifestyle. In this stage your investment emphasis is primarily on the preservation of capital and income generation. However, to provide for longer life expectancies, you should commit some of your investment assets to capital growth.

In summary, the key to accumulating wealth is twofold: Save money, and invest your money wisely. This is especially true in your early years owing to the effects of compounding, which produces greater appreciation for longer time periods. Compounding is defined as the adding of interest to principal for the current and previous periods in order to calculate the interest for the next period.

Your personal circumstances often determine the level of risk that you can assume in your investment choices. Generally, younger investors can withstand greater risk owing to their longer-term outlook of a least 20 years or more before retirement.