Before, we finish our discussion on planning for retirement, we need to talk about the “I word” - inflation. Inflation can drastically affect the purchasing power of your retirement money. The best way to avoid this is to prepare. Let’s talk about the realities of inflation and how to manage them.
To account for the continual rise in the cost of living, you’ll want to increase your cash withdrawals by 3% per year. This way your retirement income can keep up with the cost of living and inflation.
What this means is that the only year you actually take $50,000 is in year one of your retirement. That withdrawal then goes up by 3% each year. Here’s a snapshot of what that looks like.
All of this can be a bit anxiety-inducing - but let’s step away from the numbers for a moment and talk about how you can maximize your retirement investments through smart asset allocation choices that align with your timeline and income needs.
So what is asset allocation? The most important decision you’ll make because 90% of your actual return is based on how you allocate your portfolio.
Basically, asset allocation is how you spread your portfolio amongst the main asset classes of equities (stocks), fixed income (bonds & equivalents), and cash. Asset allocation is critical because it accounts for more than 90 percent of the variability of a portfolio's performance over time.
Now let’s look at how you allocate your portfolio to those different asset classes or buckets. If you put more in the equities bucket, you have the potential to earn more money over the long term, but that also comes with the potential for greater volatility. I say this to show that when you are allocating percentages of your portfolio to these asset classes it is important for you and your advisor to make sure they align most importantly with your tolerance for risk, but also with your short, medium, and long term goals, your time horizon, and your overall perspective on the markets. The “right” allocation depends on each investor, there is no cookie-cutter, one-size-fits-all scenario. I’ll put a plug in here for being transparent and having a close and trusting relationship with your advisor because after all the better we know you the better we know what to do for you.
Asset allocation can help insulate your portfolio from risk while exposing it to multiple asset classes that work differently therefore potentially softening the blow of volatility in one or more asset classes. Your age, time horizon, risk tolerance, goals, and overall perspective will help determine the proper allocation for your long-term investment portfolio.
Until next time…
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.