What is the image of retirement that comes to your mind? Perhaps it is relaxing on a beach, world-travel, or, at last, doing what you have long wanted to do, but have never had time to do. The purpose of retirement is to have fun and not to worry about finances. The thing is this, though: the way you use your retirement savings, the combination of stocks, bonds, cash, and other financial products, will determine the extent to which those golden years will be comfortable and stress-free.
This is why it is so important to select the appropriate Asset Allocation upon retiring. It is not only about maximizing the returns. It is about finding a balance between growth and safety, about not running out of money, and about peace of mind.
We will go over some of the tips that can assist you in finding a perfect mix in your specific situation.
1. Begin With Your Life objectives
You need to start by asking yourself the question: What do I want my retirement to look like?
- Do you think you travel a lot?
- Are you going to remain near home and lead a simple life?
- Do you consider taking care of kids or grandkids financially?
The amount of money you will need–and the duration of that need–depends on your lifestyle aspirations. A person who desires to go worldwide might require a greater growth allocation (an increased number of stocks), whereas a person with a poor lifestyle might require safety (an increased number of bonds and cash).
This should always start with the individual: what is the type of retirement that you desire before making a decision on how to finance it.
2. Understand Risk and Reward
Each and every asset is associated with a degree of risk and reward:
- Stocks: Risky, but may grow. They cushion you against long term inflation.
- Bonds: Less risk, more predictable but lower returns.
- Cash / CDs / Money Markets: Least risk, but least growth- mainly to meet an emergency.
The key is balance. An excessive stock exposure in retirement would amount to stress during a market decline. However, living too conservatively on bonds and cash may mean that you lived longer than what you saved. A considerate combination can assist you in sleeping during the night and also allow your money to work on.
3. Consider the So-called Rule of 100
One of the most popular rules of thumb is the Rule of 100: take 100 minus your age to determine what proportion of your portfolio is in stocks. For example:
- You would have 65 percent stock and 35 percent bonds and cash at 65.
This rule is useful, but it is not flawless. Risk is more comfortable to some than it is to others. Healthy and think you will live another 25-30 years, then you may be interested in more exposure to growth than the rule would provide. Conversely, in case you simply cannot stand market swings, you can reduce it even further.
Take it as a guide and not the last word.
4. Inflation and Longevity Plan
Two of the largest risks in retirement are:
- Living longer than anticipated – It is common nowadays to live 80s and even 90s. That is to say your money might have to last 25-30 years or more.
- Inflation that eats into savings – Prices escalate over time so that the same dollar will purchase less in the future.
That is why the majority of retirees will not be able to invest all their money in the safe assets. Part of your portfolio still requires the growth potential to keep up with inflation and sustain you over the long term.
5. Don’t Forget Flexibility
Life evolves and so should your asset allocation. Perhaps in your 60s, you hold more of the stocks to grow. However, in your mid 70s or 80s, you can move towards the safety side. Or maybe something happens to your expenses–you take in your house, or you need more medical care.
The most appropriate strategy is the one that is flexible. Review your portfolio once per year or so and revise. Retirement is not a decision, it is a process.
Bonus Tip: You should take Professional Advice for Asset Allocation
Retirement planning is complex, even when you are good at finance. All this involves taxes, Social Security, required minimum distributions (RMDS) and estate planning. With a financial adviser, you can customize an allocation to your targets and also some of the stress off your shoulders.
Final Thoughts
There is no universal retirement portfolio. The ideal Asset Allocation mix is based upon you, your objectives, your risk capacity, your medical conditions, as well as your financial conditions.
To recap:
- Begin with your vision of lifestyle.
- Balance risk and reward.
- Follow the rules of thumb as a guideline and not a Bible.
- Insure against inflation and life span.
- Be flexible and periodically examine.
The freedom of retirement is not the fear of retirement. Smart asset allocation would allow you to devote less time to worrying about money and more to living the life you have been working so hard to create.
