Simple Guide to Asset Allocation in Retirement Today

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Written By Adeyemi Adetilewa

As you get closer to retirement, you’ll want to know more about allocating your assets. Although it never hurts to work with a qualified financial advisor, this information will help.

The critical thing to know is that when it comes to the “right” strategy, there is no such thing as “one-size-fits-all.” For that reason, you’ll need to consider several factors such as risk tolerance, age, and so on.

With the following information, you’ll have a much easier time determining which allocations would work best for your investments, including IRA, 401(k), and other retirement accounts.

1. Start With the Basics

When speaking of asset allocation, we are talking about how much you should put into bonds, stocks, and other assets like cash-based. Typically, stocks provide the best potential for long-term growth. However, they can also turn volatile within a short time.

As for bonds, they work great for preserving capital. On the other hand, there are limited potential returns, and bond yields are near all-time lows. Cash-based assets are virtually risk-free, but they only provide minimal returns.

The bottom line is you want to find the right blend of return and risk potential specific to your situation.

2. Use Your Age to Determine the Ideal Mix of Stocks and Bonds

Simple Guide to Asset Allocation in Retirement Today [2021]Although cash-based assets are an option, most financial experts try to discourage clients from keeping much money in them other than what they might need for living expenses in the short run. Remember, cash-based assets won’t earn you much money, and for retirement, you want all your savings to gain something.

So, focus more on stocks and bonds. Now, you need to identify the best asset allocation.

One rule of thumb is to subtract 110 from your current age. That number will represent the percentage of your assets to allocate to stocks. Anything you have extra should go toward bonds, which are a fixed-income type of asset. 

You can also use retirement planning software such as the WealthTrace Retirement Planner to help you determine your optimal asset allocation.

You can run asset allocation what-if scenarios and the program tells you your probability of never running out of money in each scenario. This way you can see the highest level of risk you have to take in order to meet all of your financial goals.

3. Identify Your Risk Tolerance

Considering that the stock market fluctuates, you never know for certain when your portfolio could decline. You need to determine just how much risk you can handle, which is different for everyone. Remember that your portfolio’s bond portion can help offset some of this risk, although it won’t eliminate it.

Here is the deal: investing comes with risks, regardless of the type of investment. Also, markets fluctuate. The goal is to keep volatility within your portfolio to a minimum for the amount of income and growth you anticipate achieving.

For this step, use your age-based allocation from the previous step and then adjust it accordingly based on whether you prefer a lower or higher risk tolerance. For instance, if you receive a decent amount of money from Social Security, you might be okay taking on a little bit more risk with your investments since this covers your day-to-day income needs.

4. Select Your Investments

Remember that stock investments all have different levels of risk. This is why as a retiree, you should go with stocks that have a lower volatility rate. One popular option is the Vanguard High Dividend Yield ETF, which trades on the NYSE under NYSEMKT: VYM.

This particular stock invests in large companies that pay dividends well above the average. For retirees, this provides some benefits.

For example, it yields a reliable and robust income stream, the stocks are more mature, and they come from good companies. As a result, there is less volatility overall. Also, these usually do better during difficult times compared to their non-dividend counterparts.

The same applies to bonds. For these, there is a dramatic range of risk levels for all of the various types of bond investments. You’ll need to determine just how much risk you are willing to take on specific bonds.

Two excellent options include Vanguard Total Bond Market ETF (NASDAQ: BND) and the Vanguard Short-Term Bond ETF (NYSEMKT: BSV). Both of these are good choices, although the latter has a lower volatility rate.

5. Conduct Research Before Assets Allocation

Simple Guide to Asset Allocation in Retirement Today [2021]Allocating assets in retirement isn’t a one-time deal. Instead, you’ll need to reassess your allocations throughout your retirement years. This is especially true if you go through a significant life change.

Say you decide to retire at the age of 65. At that point, you should have enough money set aside to last for 20 years or longer. While you might draw income for your investments, you still want to make growth a priority.

However, after turning 80, capital preservation and income become more important than growth.

The performance of your investments can distort your allocations, in particular if your stock investments have done exceptionally good or bad. Therefore, re-evaluate your portfolio every few years so you can make any necessary modifications.

6. Don’t Overlook the Social Security Bonus

Like most people, there is a good chance you are behind on saving for your retirement.

However, when it comes to Social Security, you can take advantage of a few little-known secrets. One of these can pay up to $17,166 annually. It is all about learning how to maximize these benefits so that you can retire in peace and comfort.

To learn this secret and others, schedule an appointment with a reputable financial advisor. That way, you’ll gain tremendous insight into everything you need to know for retirement.

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