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Checking Your Allocation
As you get closer to retirement, you may be thinking about making some changes in your asset allocation strategy. When you started investing for retirement, you had a time line that stretched for decades. But now you are nearing the time when you will need to finance your golden years, and you don't want to lose that money to market volatility.
This is a legitimate concern. In general, the shorter the time period you have to invest your money, the more conservative you may want to be with your investments. That's because, although riskier investments historically have had the highest returns over time, they also have had the most volatility.
For example, stocks have risen an average of about 10 percent a year from 1926 to the present, which is about twice the return of any other major asset class during the same period. But through the late 1990s, many stocks rose at two or three times that rate or more, while from the end of 1999 through 2002, they fell an average of more than 14 percent, based on the Standard & Poor's 500 stock index. For the entire period, stock returns were about the historical average of 10 percent. But if you needed your money between 1999 and 2002, you could have been hurt by the short-term decline.
For that reason, many people tend to move their money out of stocks and into more-conservative investments like bonds as they get closer to the time when they need to spend that money – such as in retirement. However, in retirement you will have both short-term needs and longer-term needs, because you hope to live a long time once you hang up your time card.
No one knows how long they will live, of course. But we can look at statistical averages. According to the U.S. Department of Health and Human Services, if you are currently 40 years old, you can expect to live almost 40 more years. If you are 50, you can expect to live more than 30 years. And of course, you could live even longer.
This is not short-term investing.
So, while you may want to make some adjustments to your asset allocation as you near retirement, you may want to move cautiously. Adopt a balanced approach that considers both your short-term and your longer-term needs.
By looking at your total portfolio and considering other issues such as tax and inheritance questions, you can determine what investments you might want to shift, and how. That way, you can help protect yourself against short-term volatility and still ensure that your retirement will not outlast your nest egg.
For more information on managing your asset allocation, contact Larry Stein at 847-572-0825 or email@example.com.