Asset Allocation, (Re-) Balancing and Your Retirement by Ken Mahoney

Because baby boomers are living longer than the generations before them, the United States Labor Department recommends that baby boomers plan for a 30-years worth of income to cover their expenses during retirement. This helps boomers to ensure that they don’t run out of money before they die. Your financial affairs are not going to organize and plan themselves, which means you need to be proactive in planning for your retirement.

And getting your financial future in focus requires taking steps to understand the state of your finances today and to make a plan for what kind of income and expenses you will have during retirement. Once you have these figures, you will be able to plan out the steps you need to take now in order to get you to where you need to be for retirement. It does not end there either. It is not a plan you create and walk away from for 30 years until you are ready to retire. Your retirement plan requires you to regularly review your financial investments to see how each one is performing and making necessary adjustments as time goes by.

Risk

Risk is something you need to adjust as the years go by. When you are in your 20s, you have forty years or so for your investments to grow before you retire. You have the time to take on more risk when choosing investments than you do in your 40s when you only have 20 years or so until retirement time. Even during your retirement years, your risk level changes, decreasing more and more as you get further and further into your retirement.

Asset allocation

It is also important to diversify your retirement investment portfolio. Diversification helps you to balance your portfolio, so when one investment is not doing well, the other investments that are doing well balance the portfolio out—reducing your losses. Once you have a clear sense of your current asset allocation, it is also important to remember that you have to be flexible—even as the years pass away. Flexibility is important because it will allow you to make clear and educated choices on changes that you need to make in your portfolio to get your investments back on track—helping you to reach your retirement goals.

Types of investments

Everyone is different and investment needs are just as different as people. Luckily, there are many different investment possibilities to choose from, which means you can look for and invest in investment vehicles that are right for you.

n Passbook Savings Accounts
n Certificates of Deposit (CDs)Real Estate
n Stocks
n Bonds
n Mutual Funds
n Precious Metals and Commodities
n Foreign currencies
n Annuities

Investment rule of thumb

The rule of thumb used to keep financial portfolios balanced is to deduct your current age from 100. The answer you get is the percentage of your portfolio that should be invested in stocks. The remaining percentage should be invested in bonds and cash. So if you are 40 years old now, 60% of your retirement investment portfolio should be invested in a variety of stocks. The remaining 40% of your portfolio should be in bonds and cash.

Why is this the rule? It goes back to the thought process of asset allocation, which states that as we get older, we should take less risk. Since stocks tend to be volatile, while bonds and cash are more stable, it makes sense that the older we get the more we will reallocate the stock investments in our portfolio into cash and bonds—the safer investments. A stock heavy portfolio can leave you with big losses, which can wreak financial havoc on your retirement when you need to sell or liquidate the stocks for income.

On the flipside, cash and bonds are victims of inflation. These investments usually do not grow at a value that keeps up with or is higher than the inflation rate. For example, cash and bonds may grow at a rate of 2% per year and inflation may increase by 4% per year. In this type of a scenario, your portfolio is not growing enough to cover the costs. So while you may decrease the risk of capital losses by limiting the percentage of your stock investments as time goes by, you can decrease your buying power as inflation eats away at your cash and bond earnings. This is why it is important to find a balance in the investments in your retirement portfolio.