Though each investor will have to decide how much risk is too much, as an investor nears retirement, it is important to reduce risk. Investors should reduce the amount of money invested in the stock market and increase the amount of money invested in fixed-rate securities each year. One formula to determine proper exposure to the stock market is to subtract the investor's age from 115. For example, using this formula, an 80-year-old investor should have 35 percent of his investments invested in the stock market.
The volatility of the stock market provides the opportunity for those owning stocks to see rapid appreciation on the value of their investment. This volatility, however, also means that the investment potentially can decline rapidly. Investors 60 or older should consider moving the portion of their retirement money invested in stocks into well-diversified mutual funds that reduce the risk of rapid price movements. These funds provide investors some exposure to the stock market without the risk inherent in owning individual stocks.
Bonds are a popular fixed-rate investment product. A bond works like a loan. The investor loans the money to a corporation or government entity and receives interest payments over time and the entire investment amount when the bond matures. Bonds are a useful investment for people nearing or in retirement as the money is secure and provides a source of income. In general, the riskier the bond, the higher the return, with stable government bonds typically paying a lower rate of return than many bonds issued by corporations.
An immediate annuity is another investment for those approaching retirement age to consider. An immediate annuity is an investment product that provides the investor with a stable monthly payment for life or other period of time. Annuities remove the risk of investment, but annuities are difficult and expensive to close. Investors making the decision to buy an annuity need to fully understand all of the rules regarding the annuity to make certain that it will meet their needs.
Many investment companies provide specialized programs to manage retirement accounts. These services work to manage the money of retirees based on the investor's age, expected date of retirement, tolerance to risk and other factors. Investors who do not feel comfortable managing their own account should consider using one of these programs. As when choosing any investment plan, investors should talk to a number of different companies and compare the costs and benefits of each plan.