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June 28, 2020
Figuring out the best asset allocation strategy for your retirement isn’t something you can set-and-forget. Here are some tips on how to update and maintain your asset allocation to maximize returns and reduce risk.
Asset allocation refers to how your money is invested in different types of asset classes like stocks, bonds, real estate, cash and other.
There is absolutely no single best asset allocation strategy that will work for everyone. However, figuring out the best asset allocation strategy for your retirement will be based on:
Different types of investments will be better or worse for you, depending on how you answered the above questions. For example:
Stocks: Some asset classes – like stocks – are best if you want to grow your money and you have a long time before you will need to cash in. You need a long time horizon so that you can hopefully ride out any downturns in the financial markets.
Bonds: Bonds are a better bet if you need to be sure that your capital will be preserved but still want some degree of return on your money.
Cash: Cash is relatively risk-free, but doesn’t offer any upside so it should only be used for short-term needs.
You have two lives: your working life and your life in retirement.
When you approach retirement, your asset allocation goals shift significantly – it’s a whole new life and experience for you and your money.
In general, there are 5 basic steps to arriving at an asset allocation strategy tailored to you and your needs in retirement:
Money that you need right away should be in cash. Money that you’ll want within the next few years might be held in bonds. Money that you might use in 10 plus years could possibly be in mutual funds, or perhaps stocks. Assets that are earmarked for leaving a legacy could possibly be in the riskiest types of investments – depending on your risk tolerance.
Learn more about How to Build a Retirement Income Plan.
One method for balancing the desire for growth with the need for stability is a retirement bucket strategy. With this approach you establish different “buckets,” or accounts, for different types of spending.
Explore 3 Common Ways to Set Up a Retirement Bucket Strategy.
Mr. Bond once said, “I don’t stop when I’m tired. I stop when I’m done.” This quote could easily be applied to the task of maintaining your asset allocation strategy. It is not enough to set it up once and think that you are done.
You must figure out how to maintain and evolve your strategy through to the end.
The most common way to maintain your asset allocation strategy is to periodically rebalance your portfolio back to your target asset allocation.
For example, if you decided that your ideal asset allocation is 45% stocks or mutual funds, 40% bonds, and 15% cash, then you would need to buy and sell in and out of your various positions to return to those ratios – assuming that you withdrew funds and that the various assets got varying rates of return.
This is the most basic way of maintaining asset allocation. However, there are other ways of determining and managing asset allocation: constant-weighting, tactical asset allocation, dynamic asset allocation, insured asset allocation, integrated asset allocation. and more.
This article attempts to simplify the thinking around determining the best asset allocation strategy. However, the reality is that it can get pretty complicated.
It is likely that you could benefit from some professional guidance if you want to feel truly confident about your retirement investments. In fact, according to data from the Insured Retirement Institute (IRI), the percentage of Boomers working with a financial advisor who are highly confident in having sufficient savings to live comfortably throughout their retirement years is more than twice that of Boomers who are planning for retirement on their own.
Try a free consultation with an advisor from NewRetirement.
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