Retirement Asset Allocation

Retirement Asset Allocation

Retire On Track LLC.

Often financial "experts" make asset allocation for retirement planning difficult to understand.  This article covers (1) what asset allocation is and why it is important (2) the main asset categories, and (3) your ideal asset mix.

Asset Allocation

Asset allocation simply means how your investment portfolio is divided across different asset classes or investment types.  This is often confused with diversification.  Diversification refers to buying a number of investments within an asset category to reduce investment risk. 

Asset allocation theory states that by dividing your portfolio into different types of investments, you can reduce the volatility of your portfolio.  Some financial experts claim this is more important than the individual stocks you choose.  I believe that both proper allocation of your portfolio and careful selection of investments within each asset category is the key to long-term investment success.

Asset allocation of yesteryear used to be simple.  The formula was to subtract your age from 100.  This resulted in the percentage of your portfolio you should have invested in stocks.  For example: a 65-year-old would have 35% in stocks and 65% in bonds and cash.  But, due to longer life expectancies, people run the risk that their investments will not grow fast enough to last their lifetime, when following this formula.  Reading this article and using the retirement calculator available at www.retirementcalc.com can help prevent this from happening to you. 

Asset Categories

There are three main asset categories; (1) Cash and cash equivalents, (2) Bonds (income investments) and (3) Stocks (equity investments).

Each of these categories has risk associated with it.  Generally, the more risk you assume, the higher the return.  The relative risk pyramid below shows various investment choices ranked from highest risk and potential return at the top of the pyramid, to the lowest risk and potential return at its base.

Highest risk & return

Lowest risk & return

Options, futures, low-priced or "penny" stocks

Small-cap stocks, low quality stocks, collectibles, mid-cap stocks, low quality or ?junk? bonds, specific industry/sector mutual funds

Quality growth stocks or mutual funds, large cap stocks or mutual funds

High quality convertible bonds or High quality convertible bond mutual funds, high quality preferred stock or high quality preferred stock mutual funds, balanced stock and bond mutual funds

Money market accounts or  money market mutual funds, high quality corporate bonds, high quality corporate bond mutual funds, high quality municipal bonds or high quality municipal bond mutual funds

U.S. savings bonds, U.S. treasury issues, federal agency securities, insured savings and checking accounts, insured certificates of deposit

Asset Mix

In order to find your ideal mix, you should complete MFS.com's short questionnaire. The example shown is a possible result from the completing the questionnaire. 

Once you have your ideal mix identified, you can plug these percentages into the retirement calculator.  This will help to identify if there is any shortfall with your current plan. If there is a shortfall, you can plan to work longer, take a smaller annual withdrawal amount and/or increase your savings rate.  Again, you can plug these "what if" scenarios into the retirement calculator until you no longer have an investment shortfall.  Your asset allocation plan is done, for now.

How do I keep up-to-date on the latest news impacting my retirement?

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We at Retire On Track LLC. want nothing more than to make your retirement a success.  Retirement success, to us, means never having to worry if you have enough money, being able to pursue your dreams and having fun along the way.  We provide the retirement calculator and Financial Tips & Hints to make it a reality - the rest is up to you.