One often-cited guideline for determining asset allocation when planning for retirement is that you should subtract your age from 100 to find the percentage of your investment portfolio that you should keep in stocks. For example, it suggests if you're 40, you should keep 60% of your portfolio in stocks. And if you're 50, you should reduce that ratio to 50% with the remainder in other sources like bonds and cash equivalents.
It's tempting to reach for a solution to deal with something so complex. But one fact is 100% true: You can't apply a one-size-fits-all approach to retirement planning because every retiree's situation is unique. Here are five factors that can influence investment allocations during retirement:
Personal risk tolerance. Losing sleep worrying about your portfolio is no way to spend your golden years, no matter what the numbers might suggest. If risk is keeping you up at night, you may want to consider a more conservative allocation of investments.
Additional sources of retirement income. A hefty pension benefit, sizeable inheritance or significant Social Security benefits may mean you can afford to expose a greater proportion of your investments to equities during retirement.
Insurance costs. If you retire before you're eligible for Medicare, you may have to allocate a greater proportion of your budget to health insurance until that time arrives. If so, you'll want to make sure the funds you have set aside to cover those costs are not subject to the potentially volatile ups and downs of the stock market, lest a poorly timed downturn leaves you coming up short to cover your premiums.
Age-gap couples. Nearly 10% of couples have an age gap of 10 years or more, which can muddy the retirement planning picture considerably depending on whether partners intend to retire at the same time or years apart. Different drawdown strategies, long-term care costs and decisions about when to start receiving Social Security benefits can all impact asset allocation during retirement.
Your retirement dreams. Some retirees are content with living simply, while others have grander plans that involve moving to a more expensive part of the country, dining out at fancy restaurants, traveling the world or even starting a business. Your lifestyle aspirations during retirement will also determine how aggressive your investment allocation might need to be in order to fund those dreams.
These are just five factors that affect allocation decisions during retirement - but there are many others. That's why getting the advice of a qualified financial advisor to help guide you through the complex and highly individualized process of planning for retirement is a prudent course of action. The earlier you start, the greater the chance that your family will be in a better financial position by the time you exit the workforce.
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