If you’re near retirement, you understand how stressful it is to manage your investment allocation, especially in light of today’s low interest rates and somewhat scary market.
The traditional way to allocate your investments is based on a regimented, academic perspective. Theoretically, you should subtract your age from 100, and that number is the how much of your investments should be in stocks, with the rest in other investments. Another theory states you should have a 50/50 blend of stocks and other investments in your portfolio.
However, neither of these is correct. A much more reliable way to look at your investment allocation is, unfortunately, not as straightforward. Your ideal portfolio won’t fit into a formula, as your ideal portfolio is what works for you. As you’re financial situation is unique, your investments should be unique as well.
Here a are a few pointers to help you utilize this new mindset, and allocate your investments will to maximize your retirement funds.
- Don’t Include Your Home – Your home should not be included in your retirement calculations, especially if you plan on aging in place. If you’re living in your home, you won’t be making any money from it and therefore can’t think of it as a retirement asset.
- Plan For The Worst – As scary as it is to think about, what would you do if the market goes down by 50% over the next few years? Planning for a horrible market or pullback will protect you in case there is another one during your lifetime. Think about how you reacted in the last market crash, because that’s most likely what you will want to do again.
- Consider What Income You’ll Need – Consider how much income you will need to take out of your portfolio each year to cover your cost of living. Make sure you have enough income for several years set aside in non-stock investments. For example, if you think you will need $40,000 a year, leave $250,000 in safe investments. This way you wont have to take money out of stocks to cover your cost of living or other expenses.
- Think About Other Sources of Income – You most likely won’t be living off of just your retirement funds and savings. If you’re lucky enough to have a pension, you could definitely take more risks with your saved money because you won’t be as dependent on it.
Don’t get caught up in the mathematics and percentages of retirement fund asset allocation. Instead, put your energy into creating a unique portfolio that will work for your specific needs.
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