How to Invest for Retirement With Mutual Funds
Answering these two questions may help you determine your course when it comes to evaluating if you should invest your IRA account into a balanced fund.
- Do you have sufficient funds in savings accounts or other liquid assets?
A key issue is whether you are drawing from your IRA exclusively to meet living expenses or if you have other resources. If you are at an age where you can draw freely from your IRA if you wish, income tax will be due if it is a traditional rather than a Roth IRA.Be advised that a balanced fund could have large enough fluctuations in price to impact your ability to draw from it for regular expenses. However, if you also have money outside your IRA, it could act as a buffer against those fluctuations, as long as that other money is invested in stable and liquid vehicles like savings accounts, money market accounts or certificates of deposit.
In fact, if you have a fairly predictable budget, you could set up a CD ladder to provide periodic liquidity to provide for your regular expenses. This would allow you to leave your longer term investments untouched, except to the extent you are making required minimum distributions.
- How are you handling your required minimum distributions (RMDs)?
If you are past the age of 70 1/2, you are probably already very familiar with RMDs and should have been taking them for some time.A crucial point about RMDs is that having to take them out of the IRA does not mean having to spend those distributions in full. In fact, saving some of the amount you are required to take out of the IRA, if possible, is a good way to preserve retirement resources. While investment returns on this money would no longer be protected from taxes, it could provide a cushion against fluctuations in the remainder of your IRA in future years.
Learn more: A complete guide to IRA accounts
Is a Balanced-fund Risk Profile Appropriate for Your Age?
Balanced funds generally have between 50% and 75% in stock. In isolation, this might seem like a slightly risky asset allocation for someone your age – but that really depends on your answers to the two questions above.
If you have other, more conservative assets outside of your IRA, and/or you do not need to spend your entire RMD amounts for living expenses, you have some cushion against fluctuations in your balanced fund. This would allow you to maintain a growth-oriented asset allocation later into retirement. The plus side of doing this is that growth investments give you a better chance of staying ahead of inflation.
It sounds as though you have saved well for retirement. Now the task is to continue to invest wisely and budget prudently so you can preserve those resources through retirement.
Frequently Asked Questions
Q: Are IRAs risky? Could I lose my money?
A: An IRA can be just about as safe or as risky as you choose to make it, so perhaps the best way to start in answering your question is to explain what an IRA really is.
An IRA (Individual Retirement Arrangement) is a personal savings plan which has certain tax advantages. The conditions governing IRAs are centered around how you can put money into it, what the tax advantages are, and when you can take money out of it. You have a great deal of latitude concerning how you invest the IRA, and that’s what determines the risk.
In this sense, think of an IRA as a briefcase — it is simply a vehicle for carrying your savings. What you put in that briefcase is up to you, and can range from the safe to the dangerous.
You can, for example, use CDs, savings accounts, or money market accounts to fund your IRA. That way, your accounts won’t fluctuate in value, and you can even be protected by FDIC insurance (up to $250,000) with participating banks. Your money would be safe, but you would be limited to the best CD rates, savings, or money market rates you could find.
On the other hand, you could invest your IRA in a stock portfolio. You wouldn’t have FDIC protection, and your IRA would fluctuate in value. However, you would have the possibility of earning higher returns.
In short, an IRA can work for you whether you decide to take a low-risk approach, a high-risk approach, or something in between. To be safe, you might start an IRA with a low-risk approach so you can start benefiting from the tax advantages, and then add in a little more risk when and if you think it is appropriate.
