Your financial ability to take risk should determine the types of investments you choose for retirement savings. Generally, the more risky an investment, the higher the investment's potential return.

Investment risk

When you invest, you hope to make money. But you also run the risk of losing some or all of your money. That's why it's important to understand the types of investment risk shown in this chart.

Understand the Types of Investment Risk
Principal risk	The risk that you'll lose some or all of your invested funds.
Inflation risk	Inflation (increases in the cost of living) will erode the buying power of the dollars you set aside today.
Interest risk	Interest rate changes will affect the prices of bonds and cash alternatives and the amount of income investors will receive from these investments.
Credit risk	The issuer of a bond or cash alternative will default in paying interest and/or principal.

Please note that this list is not exhaustive of all types of investing risk. Investors should review all financial material for information regarding the specific risks associated with a particular investment before investing.

Risk tolerance

Which types of investments are right for your retirement savings program?

Before you can answer that question, you need to understand risk tolerance — one of the most important considerations when building your investment portfolio. Although many investors believe risk tolerance is a reflection of their emotions, the more important component is your financial ability to take risk. Keep in mind that:

• Emotions are important, but unreliable. Your feelings about risk can change from day to day and can run counter to sound investment strategies.
• Ability is based on facts. Your true risk tolerance is grounded in your financial ability to take risk. This chart shows factors to consider when you evaluate your risk tolerance. If you're pursuing financial goals as a couple, you must also analyze your spouse's or partner's risk tolerance.

How Much Risk Can You Take? Consider these factors and how they interact
Lower ability to take risk	Higher ability to take risk
Time:	Time:
Short time horizon (a few years before your financial goals)	Long time horizon (many years before your financial goals)
Level of portfolio contributions:	Level of portfolio contributions:
Low relative to your financial goals	High relative to your financial goals
Income and savings:	Income and savings:
Low to moderate income	Moderate to high income
Low income stability	High income stability
Low job security	High job security
Low savings rate	High savings rate
Other factors:	Other factors:
High debt levels/ratios	Low debt levels/ratios
High liquidity needs (for example, may need to withdraw funds from the portfolio in an emergency)	Low liquidity needs (for example, would not need to withdraw funds from the portfolio in an emergency)
Underinsured	Adequately insured

Your income is another consideration in determining your risk tolerance. This chart shows how the type of income you receive may affect your risk tolerance.

Analyzing Your Income Consider these factors
If your job is ...	...then your risk tolerance may be
In a cyclical industry, such as financials, energy or industrials	lower
Compensated through a balance of base salary and variable factors (bonus, commission, overtime, stock options)	lower
Compensated mostly through a base salary	unaffected
Secured through a contract or by tenure	higher
For illustrative purposes only, investors should consult their financial advisor about their personal income and risk tolerances.