Investing for Retirement

Written By Brian Hicks

Posted September 10, 2009

Five years short of fifty, I’m sorry to say the gray hairs are starting to assert themselves.

And while it may be either my kids or these crazy stock markets that are causing them — or perhaps a combination of the two — I’m resigned to the fact a whole head of silver hair is waiting for me somewhere in my future. After all, time waits for no man. . . least of all me.

That drumbeat of moments is one that has also suddenly caught up with 78 million baby boomers.  Forty years removed from Woodstock, they’re now more concerned with their 401ks than with stickin’ it to The Man.  It’s funny how times change.

Unfortunately, rolling around in the slop and jamming to Jimi Hendrix was a lot more fun for them than any recent opening up of their 401K statements. . .

That’s because for a wide swath of boomers, the financial crisis has left them without adequate assets and savings to survive for long without a paycheck — tarnishing the gleam of their golden years.

As for Social Security, they probably won’t be able to count on those paychecks either, since the shear numbers of the boom generation will undoubtedly crush any support they might have offered.

It is a reality impossible to escape, but that’s a scary story for another day.

In the meantime, let’s just say that it’s never pretty when Ponzi schemes collapse.

That’s the bad news.

The good news — for you and for the boomers — is that tomorrow is another day, and it doesn’t have to be one spent digging deeper in the hole. Investing for retirement is something that you can contribute to without having to depend entirely on Uncle Sam or the mutual fund guy at work.

The key is taking responsibility for your own retirement and understanding how much money you will need to live on, while balancing it all versus market risk. And while it all sounds scary in its own right, it’s easier than you think. . .

Investing for Retirement Means Asset Allocation

It all starts with a plan and proper asset allocation, which to a large degree helps to minimize market risk over time. The assumed degree of safety, of course, is individual; it depends on how many years remain before you retire.

Typically, the general rule holds that the way to allocate your portfolio is to subtract your age from 110 and devote that percentage of your portfolio to stocks, with the remainder held in bonds and cash. For instance, by this rule of thumb, a 70-year-old individual would need to devote 40% of their portfolio to stocks and the rest to bonds and cash.

However, like most "rules of thumb," these calculations tend to paint every investor with the same brush. Unfortunately, it’s more complicated than that.

After all, if that same 70-year-old was 40% invested in stocks last year, their retirement account would have taken a beating they may not have been able to afford.

In other words, money that was earmarked for a goal that’s only one to two years away should have been safely stowed in a money market account or high-quality short-term bond fund. Again, it’s all about the risks toward principal.

As a result, the process of figuring out which combination of assets to hold in your portfolio is a very personal one. That’s because no two investors are exactly alike.

The type of asset allocation strategy that works best for you, then, will depend largely on your time horizon and your ability to tolerate risk.

Here’s a look at both of these factors and what you may need to consider as you weigh your options:

  • Time Horizon – Your time horizon is the expected number of months, years, or decades you will be investing over to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets. By contrast, an investor saving up for a teenager’s college education would likely take on less risk because he or she has a shorter time horizon.
  • Risk Tolerance – Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve his or her original investment.

Call to mind the saying, A bird in the hand is worth two in the bush; the conservative investors aim to keep the "bird in the hand," while aggressive investors seek to gain "two in the bush."

How you play it, of course, is up to your individual situation.

The 5 Keys to a Successful Retirement Portfolio

Here are the top five things to know about building your retirement portfolio:

1. Time is on your side — Those with more years until retirement can afford to put a greater percentage of their assets in the stock market.

2. Stocks mean risk and return — Those with a higher tolerance for volatility should put more money in the stock market than those in the same age group who have a lower tolerance.

3. Allocation is the key to achieving your goals — Studies have shown that asset allocation is the single most important factor in determining returns from investing. The key is to be diversified across all asset classes.

4. Determine your long-term goals — Do you want to buy a sailboat after you retire? Or pay off your mortgage so you can write a novel? Figure out what your long-term goals are and what they will cost. Then build a plan to achieve them.

5. Get started today — It’s never too late to get started, and it’s never too late to revamp or revise an asset allocation plan. This is the most important step of them all.

So whether you have flecks of gray or an entire sliver mop top, now is the time to start thinking about tomorrow. Yesterday’s gone and the retirement fairy was last seen with Al Gore, hovering around an empty lock box.

Now more than ever, how you spend your golden years depends entirely on you.

Next week, we will take a look at income investing and why dividend stocks and mutual bonds should be a major part of every retirement portfolio.

Your bargain-hunting analyst,

steve sig

Steve Christ

Investment Director, The Wealth Advisory

P.S. If income investing sounds appealing to you, I have developed a 5-stock portfolio of income investments that could make your retirement years golden after all. It’s a mix of dividend stocks and municipal bond funds that pay steady income, ranging from 6.23% to 9.14%.The best part is they’re as safe as it gets in equities. To learn more about this dividend money machine, click here.

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