Investing for retirement—is it luck?
Scarlett Ungurean. (Photo by Michael Schacht/312Elements Photography)
Accumulating your desired retirement fund balance relies mostly on the amount that you have saved. But investing your savings is also an important aspect of achieving your retirement goals. To understand the importance of your savings habits, see this Sept. 11, 2024, article in the ABA Journal: "Getting ready for retirement is easier than you think."
Before investing, you should assess, honestly, your investment knowledge. According to a recent survey from Voya Financial, 37% of people across a range of ages identified themselves as either a beginning investor or not an investor at all. So are you a novice, or do you have experience investing? Are you successful at investing, or do you have investment regrets when you lose your hard-earned money?
Deciding what to invest in depends on many factors. You have to consider how much risk you are willing to take on, your retirement goals and how you will execute your plan.
Choosing your investments starts with an understanding of the most common investment types.
Breaking it down
Investments, whether in or outside a 401(k) plan, can be divided into three categories: stocks, bonds, and cash and cash equivalents.
• Stocks represent an ownership interest in a company, so when you invest in a stock fund, you’re investing in shares of several companies.
• Bonds are investments issued by governments and corporations when they want to raise money. When you invest in a bond, you’re giving the bond issuer a loan, which they agree to pay back over a defined period of time, with interest.
• Cash and cash equivalents include investments that can be easily liquidated, like money market funds, which invest in short-term, low-risk bonds, and cash and cash equivalents.
Stable value funds, a hybrid security only available in your 401(k), are alternative investments with a similar objective to money market funds. While it may be difficult to understand all the nuances of the investment, the bottom line is that it is a capital preservation investment vehicle. While no losses have been experienced industrywide, when investing in these funds, you should expect to withdraw the amount that you contributed plus interest, which is added to your account on a daily basis.
You can invest by buying individual securities or a fund. While the ownership structure for mutual funds and collective investment funds (typically found in 401(k) plans) are different, the end result is the same: Each invests in a pool of securities with similar characteristics. For example, there are funds that invest strictly in small company stocks or in government bonds.
Investing in individual securities is riskier than investing in a fund. Because a fund invests in many securities, the manager of the fund is not reliant on picking the right “one” security or a small handful of securities to generate your return. Many funds have hundreds of securities, so the manager of the fund doesn’t have to get it right 100% of the time for you to get a good return.
Risk and return
Risk and return go hand in hand. The riskier your investments, the more return that you should expect. So stocks are riskier than bonds, which are riskier than cash equivalents. The question becomes: How much risk are you willing to take? Your investment risk profile is dictated by a number of factors: How long until you retire? How much have you saved? Are you willing to give up some return to lower the risk of loss in your accounts? How much of your account are you willing to lose in the short term to midterm?
The acceptable level of risk for your investment portfolio is based on your answers to these and other questions regarding your specific financial situation. There is not one right answer that would satisfy each investor’s retirement goal.
For example, if you have many years until retirement, you have a longer period of time to recover from losses that you experience in your accounts, and therefore, you may feel more comfortable taking on more risk, like investing more in stocks to generate your return over the long term. While stock prices are more volatile, historically investments in stocks have been shown to generate higher returns than some other investments.
As your retirement approaches, again, depending on your circumstances, you may wish to reduce the risk associated with your investments because the time to recover your losses shrinks. For example, you may decrease your investments in stocks and increase your investments in bonds and maybe even cash equivalents.
Retirement goals
Behavioral studies have shown that when the stock markets experience a downturn, some investors get jittery, sell their stocks and invest their proceeds in money market funds. This behavior typically leads to returns that are less favorable than continuing to hold the investments. Experienced professionals have many tools and models to predict the up and down markets. They aren’t always successful.
The chart below, a J.P. Morgan Asset Management analysis using data from Bloomberg, illustrates that historically investing for the long term generates better results.
By establishing your retirement goals, you can avoid “buying high and selling low.” Will you spend your time in retirement fishing or becoming a world traveler? Once you have a plan or part of a plan, stick with it until you change your goals, perhaps because of a change of circumstance, like having a child, marriage or divorce.
Those investors with many years before they retire typically can’t conceive what they will want their retirement life to look like. If you are in this camp, assume that you’ll need the most that you can accumulate, which would mean that you would save as much as possible and be willing to take on more risk to increase the opportunity to earn a higher return. In all likelihood, you would invest more in stocks than in bonds or cash.
Executing your plan: Delegate, or do it yourself?
Your investing personality might just come down to the level of interest and time that you want to spend learning and gathering investment knowledge. After all, attorneys lead busy work lives, and as you grow in your career, your family, financial and other personal obligations will probably grow and change significantly.
If you are invested in a 401(k) plan, your plan probably offers lots of ways to get help. Most plans offer professional investment management for a fee, where you delegate your investment decisions to a financial adviser. In 401(k) plans, the financial adviser is restricted to investing your money only in those options offered by the plan. Many plans also offer holistic financial planning, which includes developing plans for retirement, budgeting and even assisting with managing school debt.
Another option you may want to investigate includes hiring a financial planner who manages your investments, also for a fee, and has the discretion to select from the whole universe of investments. But many planners require that you have a minimum account balance before they are willing to accept you as a client.
Even though you may pay for assistance with your investments, you should spend time to better understand your investing options. Your 401(k) provider is a good source of information.
Your 401(k) plan
ABA members have the opportunity for their law firms to take advantage of the retirement plans offered by the ABA Retirement Funds Program. This ABA member benefit helps law firms of all sizes, including solo practitioners, establish a 401(k) plan and has been helping legal professionals save for retirement for over 60 years. The program is committed to providing the tools necessary to help all legal professionals pursue their retirement goals.
The program’s investment fund menu offers a diverse selection of investment options to cover the broad spectrum of investors using three investment paths. You can select “Make it easier for me (diversified investment funds),” “I’m saving for retirement (do it yourself or get help to build a custom investment portfolio),” and “I’m retired or almost there (investment options that match your investing objective).”
Learn more about this ABA member benefit at ABARetirement.com.
The bottom line
There are thousands of investments that are available to you, some of which are more sophisticated, which require advanced investing experience and knowledge. If you don’t understand an investment’s potential for gain, and more importantly loss, it is not a worthwhile investment for you, regardless of whether you are using an investment adviser. While investment advisers are helpful with managing your retirement account, it’s your money and results matter. Remember: If something sounds too good to be true, it probably is.
This column reflects the opinions of the author and not necessarily the views of the ABA Journal—or the American Bar Association.
