Is a Retirement Plan an Investment?

Properly investing assets in a retirement plan leads to a safe and secure financial future.

A retirement plan is an investment in a person's future. Earmarking assets for retirement is the first step, followed by a series of decisions on how to allocate that money in the financial markets to produce profits. Since contributing to a retirement plan is an investment, there are risks involved, but the right mix of investments can protect against losses. Determine retirement goals ahead of time so investments can be tailored appropriately.

Asset Allocation

A retirement plan should not be only one investment; it should be composed of several. Dividing money across asset classes including stocks, bonds and real estate for instance, is asset allocation, and it's designed to build diversification and protection into an investment portfolio. Not all the money for retirement needs to be invested. Some assets can remain in cash for further protection against potential investment losses or to free capital and take advantage of opportunities as they arise.

Time Horizon

Establish a timeline for retirement in order to invest appropriately. If retirement is still decades away, an investor might be able to incorporate more risk into a portfolio in an attempt to strengthen returns. If retirement is near, an investor might want to take a more conservative investment approach since there will be less time to regain profits if investments falter. Even the most experienced investors cannot predict exact market activity, so adjusting an investment portfolio is crucial.

Types

Mutual funds are a common retirement investment. These investment vehicles are built with a number of different securities such as stocks in bonds in one portfolio. There are equity or stock mutual funds as well as bond funds. A balanced fund has a combination of stocks and bonds in one fund, giving investors exposure to different levels of risk in a single portfolio. A target date fund is a type of mutual fund that gives investors exposure to less risk as retirement nears.

Contributions

Assets in a retirement plan are invested in order to increase the overall value of the fund so plan members will receive those benefits upon retirement. Fund value grows via cash contributions from both the employer and employees.

References

• Star Tribune; No Public Pension Crisis in Minnesota; April 2011

Resources

• SEC: Beginner's Guide to Asset Allocation, Diversification and Rebalancing
• Bloomberg BusinessWeek; Target-Date Funds Hit Their Stride; Lauren Young; July 2008
• Charles Schwab; Equity Risk: Managing What We Do and Do Not Know; Greg Forsythe; July 2010