Whether you've worked for the same company for 40 years or have your whole career in front of you, retirement is somewhere on your horizon. Setting aside money for your golden years is only half the equation. How you save and invest that money is the other half. Getting the right mix of assets into your retirement portfolio could make a big difference in whether you retire comfortably or in style.
Time is the most powerful ally you have when it comes to growing your retirement assets. Time allows compound interest to work for you. If you have a lot of time, you can afford to be more aggressive with your investments, because you have time to overcome potential losses. If you have little time before you retire, your asset mix will likely skew toward more conservative investments. The first step in deciding on the proper asset mix for your retirement savings is determining how much time you have before you expect to retire.
Each person's financial needs are different. You might be satisfied with a little cottage on the hill with enough income to buy groceries and pay your taxes, but your neighbor might want to spend her retirement years seeing the world from a luxury cruise liner. One style of retirement requires considerably more resources than the other. There is no right or wrong answer to the question of how much money you need to retire in the style that you prefer, but the question must be answered. You can't hit your target if you don't know what your target is.
People are wired differently. Some people lie awake at night worrying that their 401(k) is going to lose money, while others get antsy at the thought of putting money into a five-year certificate of deposit and not earning enough. Your level of risk tolerance, or risk aversion, should play a significant role in determining the types of investments you feel comfortable making up your retirement assets, but it should not be the only deciding factor. Depending on where you are in building your retirement fund, you might need to stretch your comfort zone to include investments that involve more or less risk than you would ordinarily prefer.
Fix Your Mix
The right asset mix for your retirement fund will not remain static over the course of your working life, or during your retirement years. The U.S. Securities and Exchange Commission recommends rebalancing your retirement portfolio once or twice each year, although if there are significant shifts in the market, you might need to do so more frequently. Rebalancing is the process of keeping your asset allocation constant. You might determine that the appropriate allocation for your assets is 50 percent stocks, 40 percent bonds and 10 percent cash equivalents. Six months later, the stock market might have rallied, boosting the value of your stocks to the point that your portfolio now contains 60 percent stocks, 30 percent bonds and 10 percent cash equivalent. To rebalance your portfolio, you would need to sell some of your stocks and buy additional bonds to return to your 50/40/10 allocation.
- New York Times: Choice for Tight Times: Save More or More Risk
- Securities and Exchange Commission: Beginners' Guide to Asset Allocation, Diversification, and Rebalancing
- Forbes: How To Protect Your Retirement Assets From The Coming Crash
- Investor: Asset Allocation
- American Association of Individual Investors: Asset Allocation
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.