Why Your Investment Allocation Should Never Be Aged Based

Wealth Advisor

A common misconception in portfolio management is using age-based asset allocation rather than goal-oriented planning aligned with an individual’s financial objectives. Tailoring asset allocation to your specific financial plan is crucial. For instance, if you’re entering retirement with a $4 million net worth and needing $200,000 annually, the traditional 60/40 allocation might not be optimal.

Instead, your allocation should consider your income sources, Social Security, and bridging the income gap. Customizing your asset allocation based on your unique spending needs and goals ensures your portfolio aligns with your financial plan for maximum growth and security.

Video Transcript

A common misconception we see with portfolio management and financial planning is having an asset allocation that is age based rather than goal oriented and aligned with a client’s overall financial plan and goals.

If you were to Google, what should an investment allocation be for a 60 year old entering retirement? Probably would read something about being in a target date fund or 60 40 portfolio is kind of a general blanket statement that a lot of people recommend for somebody that is in retirement or getting close to retirement.

But we’re going to go through why that’s a misconception. And we want to make sure that everybody’s asset allocation is tailored specifically to their financial plan. They are about to retire, and we’ll say they need $200,000 a year to live to cover expenses and lifestyle.

And we’ll say they have a net worth investable assets of $4 million. So again, if we went with the blanket recommendation, they’d be in a 60 40 investment allocation, which would mean that 1.6 million in bonds or fixed income.

A lot of this money they may never use. It may pass on to kids or they may not use it till the later years of retirement. So we want to make sure they’re continuing to invest in equities to take advantage of the long term growth for money that won’t be accessed for 30 years.

But if we walk through this scenario, a distribution strategy, again, client needs 200,000 per year increased with inflation. And it we’ll say that husband and wife, they have maxed out Social Security and that’s paying them, we’ll estimate, 100,000 per year.

And so now we have to bridge this gap of 100,000 per year that has to come. The portfolio. Our recommendation, we always want to have seven years of backup of safe money. So in this situation, 100,000 coming from the portfolio times seven would mean they would need 700,000 in fixed income or bonds or something that we would consider a safe asset.

So in this scenario, they’re over double the allocation of bonds that we would recommend. If the client was spending more money, if they needed 400,000 a year to live on and they were taking 300,000 from the portfolio, obviously that number would be a little bit different.

But want the asset allocation tailored to exactly what their spending and lifestyle need is to make sure that they have enough money and they can maximize growth throughout the rest of their retirement years.

And on the flip side, another example, if you were, let’s say, a 35 year old couple, if they were in a target date retirement account, that would be generally if you were if you look up what’s in a 2055, that generally is a 92nd, that generally is a 90 ten allocation.

And our recommendation would be anything that’s for retirement, if they have a 30 year runway of where they’re never going to touch this money, they should be invested in 100% equities. Any bonds or fixed income should be held for financial planning purposes, any short term planning needs, or anything that we know would be accessed in the next three to three to five years or any short term window.

Important to note that a lot of this is blanket recommendations for having an age based asset allocation. And not all people entering retirement are super, and not all young people are super aggressive.

So I want to make sure that it’s tailored specifically to your family’s financial plans and goals.

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