The two biggest challenges people face in retirement are inflation and stock market declines. When it comes to fighting inflation, stocks will typically do better than bonds and fixed-income investments. However, when it comes to safety and certainty, the reverse is true. Regardless, when saving for retirement, there is no one-size-fits-all plan. There are many factors, including your tolerance for risk. So, it is always best to speak with a financial expert.
All that said, the best case scenario is to start saving for your retirement the moment that you start working. Nevertheless, retirement planning is a dynamic process and will change as you get older. As an example, a good generic retirement strategy is to take 100 minus your age. You then use that number as the percentage to place in stocks, and the balance in bonds. This will mean that a person who is 25 will invest 75 percent of their retirement savings in stocks and 25 percent in bonds. When that same person is 75 years old, they will have generally the reverse asset allocation. No more than annually, review your assets and make adjustments accordingly, selling off well-performing stocks that are severely throwing the investment mix out of line.
Still, one may want to consider longer life expectancies. A middle-class person retiring today has a better than 40 percent chance of living to 95 years old. Taking this into consideration, some financial experts have started to recommend a calculation using 110 or 120 minus your age. Because there is a good chance that you are going to live longer, you will need the extra growth that only stocks can produce. In this scenario, the 25-year-old person will invest 95 percent of their retirement savings in stocks, and the 75-year-old will have 50 percent.
Do you still have questions? What haven’t we covered yet that is important to you? If you would like to talk about the best asset allocation for your retirement, or a related topic, please contact us.