Editor’s Note: This story originally appeared on NewRetirement.
For most people, withdrawals from retirement savings are an important part of their retirement income.
To maximize your returns, but to make sure that the money you need is there when you need it, you’ll want to match your asset allocation to your risk tolerance and adjust your allocation as your market grows. tolerance over time.
In an ideal world, you would have all of your money in risk-free investments that offer high returns. However, it’s impossible to reliably assume that you’ll have high returns or low risk, and it’s almost unheard of to have both – at least not at the same time.
Here’s what you need to know about asset allocation as you age.
What is asset allocation?
Asset allocation is how your assets (money) are allocated (invested) in different types of financial vehicles.
The most common asset allocation examples involve a mix of stocks, bonds, and cash, although other investments can and should be considered.
You want an asset allocation (mix of investments) that fits your goals, your tolerance for risk, and the time horizon for needing the money.
If you have a high tolerance for risk, don’t need the money for a long time, and your goal is to maximize returns, then investing in stocks (or other asset classes with relatively high risk profiles) may be appropriate.
If you have a low tolerance for risk, need to have access to short-term cash, and aim to preserve your capital while keeping pace with inflation, then you will want to hold onto some cash. cash, others in low risk vehicles like bonds. , and some in index funds to help you with inflation.
More risk when you are young, less with age
The conventional wisdom is to invest with more risk when you are young and have long-term horizons to compensate for losses. And invest much more prudently when you’re older and relying on assets for your retirement income.
In fact, a long-standing and widely accepted rule of thumb is to subtract your age from 100 and use that number as the percentage of your portfolio that you need to keep in stocks with the remaining funds in cash and bonds.
However, some financial planners now recommend that the rule now be to subtract your age from 110 or even 120 to get the best percentage.
So if you are:
- 30, then you should have 70% to 90% of your portfolio invested in stocks
- 40, then 60% to 80% in stocks
- 50, then 50 to 70%
- 60, then 40% to 60%
- 70, then 30% to 50%
- 80, then 20% to 40%
- 90, then 10% to 30%
With the NewRetirement Planner, you can now model a change in your future rate of return.
For example, if you are now 50 years old and you model a 10% return on an account, you can now project your finances to a lower (or higher) rate of return when you turn 65 (or whatever. the age of your choice).
But, wait, age isn’t everything!
Age is not necessarily the most important asset allocation factor for everyone.
In fact, the most important considerations for asset allocation are:
- How much money do you need?
- How much money do you want?
- How quickly do you want and need the money?
For example, let’s say you’re 60 and have $ 800,000 in savings. You’ve determined that you need and don’t want to spend more than $ 500,000 of your savings over your projected longevity (plus 10 years for good measure).
You could invest $ 500,000 in an asset allocation strategy based on your age, with the remaining $ 300,000 invested for all of your other financial goals.
Sub-fund strategies are one way to determine the ideal asset mix for you.
You determine your ideal asset allocation based on different types of slices of money.
Learn more about 3 different types of fund strategies.
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