If you're a student or a young alumnus, retirement planning probably doesn't seem like your top priority. However, according to Satish & Yasmin Gupta College of Business Assistant Professor Jenny Gu, a Chartered Financial Analyst (CFA), it's never too early to start planning for this major life event.
Beyond employer-sponsored retirement plans — which on their own will not always provide sufficient funds to retire — what should one do with one's savings to best prepare for the future?
If you want to invest your money, you have a variety of options, ranging from low risk to high, which include a certificate of deposit (CD), a U.S. government treasury bond (T-bond), stocks or real assets (such as real estate).
To decide what is best for you, Gu suggests you consider six things:
1. Risk: What is your risk tolerance? Typically, the younger you are and the longer you have until retirement, the higher your risk tolerance.
2. Return: Return goes hand in hand with risk. The higher the expected return, the higher the risk. The expected return with a CD would be very low, as would be the risk; with stocks, both would be much higher.
3. Time horizon: Your time horizon is the amount of time you have to accumulate the necessary funds for retirement. When you're young, you have a long time horizon and, again, can take more risk.
4. Liquidity: What are your liquidity needs, such as monthly bills, rent or mortgage, groceries and other expenses? The higher your liquidity needs — the more money you need to have readily available — the lower your investment should be.
5. Taxes: Basically, you always want to minimize tax payment and maximize tax benefit.
6. Legal issues: Especially when you reach the point of estate planning (designating heirs, etc.), you need to pay attention to what the law says.
What if you don't know or understand the first thing about any of this?
"A financial advisor can help you," said Gu, who, being a CFA, ought to know.