Will You Run Out Of Money In Retirement? Proper Asset Allocation Can Save Your Golden Year Dreams

Posted: 22 Feb 2008 | Categories: Investing

Surprisingly few new retirees or pre-retirees have a plan for the allocation of their portfolio assets. However, if your portfolio is to be a source of financial security during your retirement years, then it must be carefully tended, like a garden, so that it continues to grow. Apart from the obvious benefit of additional resources during your retirement years, there are a number of factors that reinforce the necessity for continued portfolio growth.

Inflation erodes assets, which could make it necessary for you to lower your standard of living, not a happy thought.

You might be forced to make withdrawals at a percentage rate that is higher than your portfolio is actually earning. This substantially shortens the life of your portfolio. Remember, your goal is to make your assets last as long as you do, or longer.

With medical science now making it possible for us to live longer, maintaining steady growth in your portfolio’s assets takes on a completely new level of importance.

Finally, a weakened portfolio necessarily limits what you can pass onto your heirs.

In the event that your retirement income alone will not cover your post retirement expenses, ideally the earnings from your portfolio will make up the difference. Even if you are one of those who have saved enough so that you will not have to work after you retire, your portfolio will require regular attention if it is to help support the lifestyle you wish to enjoy during retirement.

Asset allocation is part of the general retirement planning process, the goal of which is to determine the optimal allocation prior to the selection of individual assets or classes of assets. Put a different way, asset allocation establishes your portfolio policy. Your funds are invested in various types of assets thus allowing you to achieve your financial goals and take advantage of risk reduction through optimal portfolio diversification.

The three basic types of asset classes are stocks, bonds and cash. The percentage of each asset class in your portfolio depends on a number of variables, including but not limited to your financial goals, current savings and investment plan, time horizon and risk tolerance. Bear in mind that over 90 percent of the performance of your portfolio is predicated on how the assets are allocated.

To reduce risk (and maximize return), select asset classes that compliment each other. Bearing in mind, once again, that you are likely to live twenty-five to thirty years into retirement., keep at least a portion of your assets in equities for the long term.

New retirees (or those retiring soon) are often tempted to switch their portfolios into a very conservative mix. Although such a mix may protect your portfolio from a decline, it also limits growth potential. If during your working years you maintained a balanced combination of stocks, bonds, and short-term investments, and if you have made periodic adjustments as needed to maintain the right mix of growth, income, and stability, you may not need to make changes in your portfolio when you retire. As you get further into retirement, however, you will need to consider shifting to a more conservative mix.

Asset allocation is the single most important step in making your retirement years the golden years you thought they would be. It is better to spend your time to get this step right instead of worrying about the individual investment themselves.

Visit http://www.livelongliverich.com for more information about how to allocate your assets and more information on planning your retirement. Make sure to use the Rappaport Retirement Index when calculating your withdrawal rates. Sing up for the free news letter and make sure you buy a copy of Live Long Live Rich- Creating Your Retirement Paycheck. Easy to understand, simple strategies for creating retirement income.

Article Author :H_Craig_Rappaport