Investing for Retirement – The New Way
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One of the biggest myths in investing funds to your retirement portfolio is that the investor should stick to mainly conservative investments such as bonds and cash reserves. The idea is that as you grow older, you’ll need money more readily, so playing it safe is the idea here. Interestingly, there’s an old method of determining your asset allocation by subtracting your age from 100. The difference is the amount (percentage) that you should devote your assets to for stocks. So a 60 year old person would have 40% in stocks. Sounds like a plan? Not for many.
Today, the retirement investing may not have the same goals for various reasons. One, the age of retirement could vary dramatically. Individuals could retire in their 80s, or others may want to retire in their 60s, depending on their retirement assets.
There are also investors who have saved very little for retirement. Often they find themselves in a catch-up mode. This isn’t the age-old pension plan that older generations relied on for their savings. More retirement plans are now defined benefit plans so the plan participant will have to provide how much they will contribute and how they will allocate their investments.
Sometimes, you’ll find investors not willing to place part of their paychecks for retirement. It behoves individuals facing a close retirement to accelerate their contributions and place assets in more aggressive stocks. Since aggressive assets such as stocks can help you increase your returns, catch-up employees need to weigh investment risks and returns carefully.
Retirement participants also underestimate their longevity and as such, they assess their length of retirement incorrectly. As individuals live longer, retirement income may erode over time. Especially for the person that takes the conservative approach to investing, less money may be available during the later years of retirement. One must evaluate other sources of income and determine if these sources can contribute. Consider Social Security or income from a part time job. Such alternatives may allow the investor to rely less on the retirement accounts and allow the person to adjust the allocation accordingly.
The fact remains that the investor needs to assess time horizon, risk tolerance and retirement goals in today’s environment, like any non-retirement portfolio. With people living longer, it makes sense to evaluate your investment portfolio for the long retirement. A 60 year old person thinking that he or she will retire soon may want to consider living in the 90s, a 30 year stretch for the retiree. How does one account this long duration? One would clearly have to account for the time horizon, which means allocate more to stock funds. Remember, stocks outperform bonds in the long run. A person at the age of 60 will be left out if their asset allocation is 40% in stocks. The long-term range may push the investor to take a more aggressive stance such as a 60% stock and 40% bond ratio.
Planning for retirement is not an easy step. One has to assess goals and other factors that will lead to proper asset allocation. More specifically, investors need to consider aggressive vehicles such as stocks, even at the beginning of retirement. There’s still hope. Retirement asset allocation tools are available that can help you plan for retirement. Ask your investment company if they have online calculators, or, simply, go to one of the two largest mutual fund companies (vanguard.com or fidelity.com). Personal financial advisors are a good way to get professional help as well.