To help you accomplish your retirement investment goals, you'll need to consider your time horizon, your risk tolerance, your rate of return, and your investment knowledge (that is, how well you know the risks and opportunities associated with different investments). The investment strategy you develop to reach your goals depends on all four of these areas, but it is your tolerance for risk that will weigh heavily in determining the investments you choose.

Time Horizon

Based on today's life expectancies, if you plan to retire at age 65, your time horizon for investing for long-term goals is more than 20 years. When planning for your retirement, unless you have a short lease on life, it's best to assume that you will be living to at least age 85.

When developing an investment strategy for retirement, you'll need to invest differently for short-term goals (one to three years) such as your emergency fund or travel money, intermediate term goals (three to five years) and long-term goals (more than five years).

Money for short-term goals should be invested for stability. Investments include a bank or credit union savings account, bank and credit union certificates of deposit, or bank, credit union or mutual fund money market accounts. Individuals in a 25% or higher federal income tax bracket should also consider tax-exempt money market funds. Three to five years is intermediate term. The money for those investments should be in cash and cash alternatives and short- and intermediate-term bond funds, Series EE bonds, and Treasury bills and notes.

In terms of allocating your assets for the long-term (more than five years), your goal for retirement is to grow your money while at the same time maintaining stability in your portfolio. You should think seriously about allocating some of your investments in the stock market for that time horizon (see the section Basic Principles of Investing), but you will also need to pay attention to your ability to tolerate risk.

Risk Tolerance

In setting your objective, make sure you take into account, how much risk are you willing to take. Think of investments and risk as running across a spectrum, with investments with low risk at one end and high risk at the other. With lower risk investments, safety of principal and minimal or no fluctuation in the value of your account is critical. As a trade-off, you are willing to accept a lower rate of return. Your tolerance for risk is usually lower when your time horizon is short-term. Typical lower risk investments are bank accounts, certificates of deposit, money market funds, Treasury bills and guaranteed investment contracts.

With higher risk tolerance, your goal is growth in your portfolio. You are seeking higher returns. You are willing to accept greater volatility over the short term because your time horizon is long term. Typical higher risk investments are growth stocks and growth mutual funds, international stocks and international or global mutual funds, individual company stock and real estate or real estate mutual funds.

IMPORTANT NOTE: Many retirees focus heavily on a high current return on their investments. By doing so, you may be tempted to invest in riskier investments, such as junk bonds. Keep in mind that although you may be receiving more current income, you may lose principal prior to maturity. Good portfolio management involves getting the best balance of risk and return.

Investment Return

Historically, different investments or asset classes have achieved different rates of return over different time periods. When you compare the returns on common stocks, bonds and cash, common stocks have had the highest rate of return over a long period of time.

Cash and/or cash alternatives, which may provide safety of principal and pay interest, have provided the lowest long-term rates of return. If your risk tolerance is low, you'll need to assume a relatively low rate of return on your investments when you do your planning. Likewise, if your risk tolerance is higher and you have a long-term time horizon, investing in common stocks or stock mutual funds will allow you to assume a higher rate of return for planning purposes.

SUGGESTION: One of your basic objectives should be to achieve a long-term rate of return that is at least 3% above the inflation rate.