Understanding the Difference between Variable and Fixed Investments in Your Retirement Account

Understanding the Difference between Variable and Fixed Investments in Your Retirement Account

The thought of saving money for retirement is one that may strike fear in the hearts and minds of many individuals. After all, young savers only have about 40 years to accumulate enough money to last throughout their entire retirement, and they must do so without knowing exactly how long their retirement will last. If individuals are only saving about 15 percent of what they earn each year, then over the course of 40 years they will save only 6 years worth of salary. If you aren't sure how long you will need to use your retirement savings for income, and you don't know exactly what your living expenses will be at that time, 6-years' salary hardly seems like enough.

That is why setting aside money for retirement is just one element of a successful retirement saving plan. The other component-which is what really helps your money accumulate-is to invest the money that you save so that it can grow as you continue to make contributions. When investing retirement account contributions, savers must allocate their investment dollars in a combination variable and fixed investments.

Variable Investments

Variable investments include positions like stocks, exchange traded funds, mutual funds and some annuities. These are investments that go up and down in value based on their performance (or, in the case of funds and annuities, their underlying investments' performance) in the stock market.

Variable investments are riskier than fixed investments and can even result in losses rather than gains for investors. But variable investments also have the ability to create more impressive gains for investors than many fixed investments. Some variable investments, like stocks, may even pay dividends that contribute to a retirement account's overall growth.

Because of the risk of loss and the non-guaranteed nature of returns with variable investments, an investor's reliance on them will lessen as they age and get closer to retirement. But young investors who have a long time to save and to make up for losses they experience may rely on them more heavily to give their returns an edge.

Fixed Investments

Fixed investments include those investments with a pre-determined and guaranteed return. This includes fixed annuities, CDs, money markets and bonds. While fixed investments generally have a low interest rate, they also offer low.

Fixed investments will often take up a smaller portion of a young saver's portfolio, but that portion will expand as the saver ages and his or her tolerance for risk wanes. Fixed investments can create dependable income for a post-retiree and offer a protective hedge against losses that are experienced with variable investments.

Savers must learn to create a portfolio that has both fixed and variable investments within it in order to have a balanced and diversified portfolio that creates an acceptable weighting of both risk and return based on the saver's age, risk tolerance and income.

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