Can You Really Afford To Retire Someday?
Just 12 short months ago, many investors were afraid to open statements from their retirement accounts. Billions of dollars of hard earned savings had been wiped out in the market crash.
We’re all breathing a little easier now.
However, the effects of the market crash are still lingering for many individual investors. You might be one of them. No doubt you’re feeling it in a place where you’re most vulnerable… your retirement account.
Are you one of the thousands of individual investors who suffered catastrophic losses in a retirement plan? (If so, my heart goes out to you.)
Those of you near “retirement age” are now facing a harsh reality.
You’re probably going to need to work much longer than you had planned.
Just look at a recent survey by the Center for Retirement Research at Boston College. It shows 40% of people aged 45 to 59 now expect to retire later. Sadly, most of them expect to delay retirement by four or more years!
It’s not your fault. The problem is the 401(k) retirement plan.
As you know, the 401(k) plan requires you to plan, save, and invest for your own retirement. If you don’t do it right, you may not have enough income to retire on.
One of the biggest problems is asset allocation. Many investors sink all their money into the one or two mutual funds with the best historical track record.
It’s a flawed approach. It fails to take risk into account.
If you don’t believe me, just look at what happened during the market meltdown. Investors with heavy allocations in stocks saw their account values cut in half… or worse. By only investing in funds with the highest returns, you set yourself up for a catastrophic loss.
Asset allocation is your best defense against a catastrophic loss.
When you use asset allocation you balance risk with reward. You build a portfolio with a good mix of stocks, bonds, and cash.
There’s no single perfect allocation for everyone.
Your “proper mix” is determined by your own goals, risk tolerance, and time horizon. By assessing these for yourself, you can come up with the allocation providing an optimal balance of risk and reward.
Let me give you an example.
When the stock market is crashing, bonds tend to do well. Investors flee the stock market when they’re afraid. And when investors are afraid, they usually put their money in bonds. This dynamic causes stocks to fall and bonds to rise.
The opposite occurs when investors regain their confidence. They sell out of bonds and move into stocks. This dynamic causes bonds to fall and stocks to rise.
By using asset allocation, your portfolio should weather these types of market swings much better. Most investors who try to time the market – moving all in to stocks or all in to bonds at just the right moment – tend to lose their shirts in the process.
So, how do you determine what asset allocation is right for you? And, how do you maintain your allocation going forward?
One way to do this is to work with a qualified financial professional. Another way is to use the myriad of financial planning tools available for free on the internet.
However, financial professionals charge fees for their advice. And, you might not have the time or expertise to do this kind of work yourself.
Fortunately, there is a simpler way.
Most mutual fund companies now offer target date funds. These funds provide a ready-made asset allocation for investors planning to retire in a specific year. And, the fund automatically adjusts the asset allocation as you approach retirement.
Here’s how they work.
When you’re farther away from retirement, the fund invests a higher percentage into stocks. This should provide more growth for your investment dollars. Near retirement, the fund will shift more money into bonds and cash. This provides the stability and income you need in retirement.
In other words, target date funds put your retirement portfolio on autopilot.
If you don’t have the time or expertise to manage your retirement portfolio, take a closer look at target date funds. Yours could be the difference between retiring on time and not retiring at all!
Category: Stocks
