The third step is to understand the risks involved. Retirement savings are a long-term investment, and with any kind of investment, there are risks and returns that must be weighed up. To get the most from your investments, you should aim to achieve a balance between the two. 

The three main types of risk you need to be aware of are:

1. Capital risk
This is the risk that your investments may drop in value. This can happen with all funds. This can happen with all funds. This risk is more unwelcome as you draw closer to retirement. The younger you are, the less worried you might be about short-term ups and downs because you still have time to make up any loss. You should however note that the lower the capital risk, to lower potential return and vice versa.

2. Inflation risk
This is the risk that your investments won't grow quickly enough to outpace inflation. Even if your investments do grow in value, if they do not grow more quickly than inflation then their ‘real’ value goes down and so the buying power of your investments will reduce. This can happen with low capital risk funds, such as the Cash – Active Fund.

3. Pre retirement risk
When you reach retirement, you will have a number of options for using your retirement savings. Pre-retirement risk can be defined as not investing closely enough in assets that protect against what you will do at retirement in the period running up to your retirement. For example, if you plan to buy an annuity you might wish to invest some savings in a bond fund in the run up to retirement to protect your money against changes in annuity rates. If you plan to take 100% in cash, you might wish to consider moving your investments to funds that won't move up and down a lot in the short-term (e.g. a cash fund) as you approach retirement.