The retirement options for selecting investments seem endless. But this post will point out some major retirement strategy issues that always apply. And that includes well-timed investment allocation that can help assure you achieve your goals. Don't let what happened to Xavier and Roberta happen to you.
Xavier and Roberta each saved well during their working life. They had created a business together, eradicated all their debt, and managed to allocate $750,000 in retirement investments.
They had been preparing to retire in 5 years but they didn't consider some retirement options for their investment allocation. Their financial savings objective was $1,000,000. They figured at 5% earnings it might give them $50,000 per yr - or about $4,170 monthly, in retirement. Together with their Social Security income, that $4,170 would make a secure retirement for them.
Unfortunately, all their financial savings had been 100% invested in stocks. Investing in stocks had done well for them over their long working years. And they had been eager to let things ride. Once the market went down they were left with $450,000 - only 60% of what they had before.
Though Xavier and Roberta had planned a retirement target date along with a savings objective, they lost track of safeguarding their objective with proper allocation of their investments. Investing in stocks is no sure thing (at least it's not for a short time frame such as five years) and a more balanced allocation would have been more prudent.
Retirement Guide to Sound Allocation and Re-balancing
The main principle of your retirement options to asset allocation would be to reduce your savings' vulnerability to market downturns, but permit you to share in market appreciation too. The fraction you allocate to various investment types shifts as your retirement target date approaches. Limited time horizons (e.g. 5 years) indicates less time to recover if the market turns down. So as you approach your retirement date, shift allocations away from shares toward bonds because the latter are less vulnerable to stock market swings.
With about 5 years to their target date, Xavier and Roberta should not be 100% invested in shares. An appropriate allocation might be 60% stock and 40% bonds. In fact they must have some 5% of their financial savings in money equivalents too. The table associated with these retirement options for resource allocation shows how a more time-appropriate allocation of their financial savings would have better protected against the market decline.
Assigning your savings means dividing them between non-correlated investments - investments that generally react in a different way to the market. Common allocations are between shares and bonds and for many, today include commodities. You are looking for appreciation in stock values and interest income with bonds. Commodities provide a hedge, often moving up when financial assets move down (but not always).
A suitable allocation will not assure you'll suffer smaller losses in financial savings if markets head south.
The better allocation would've improved their opportunities of recovery. And its 'after crash' allocations would recommend reallocating once more by purchasing stock at their depressed rates. Performing such (buy low, sell high) that may enhance recovery and shorten their 'new' time to retirement.
Retirement Options Matrix
Under Different Allocations
|Xavier and Roberta Allocation||100%||0||0||100%|
|Before Market crash||750,000||0||0||750,000|
|After Market crash||450,000||0||0||450,000
(40 % loss)
|Before Market crash||450,000||262,500||37,500||750,000|
|After Market crash||270,000