Allocating Assets by Life Stage

Allocating Assets by Life Stage – When allocating assets, the age of the investor is a key factor — although not the only one. Certain asset combinations fit particular life stages. For most investors, the primary goal is financing a comfortable retirement and then preserving their retirement resources.

A model for every age

The principles behind age-related investing are to start early, commit as many funds as possible, accept a trade-off of more risk for growth during younger decades and segue toward capital preservation in later periods.

In your 20s and 30s, time is on your side. The more you can invest, the more you will benefit over future decades from the magic of compound interest. (Note that $10,000 invested at age 25 at a 5% return will generate a whopping $70,400 by age 65 through compounding.) A rule of thumb suggests about 80% in stocks and 15% to 20% in bonds and cash while always holding at least six months of emergency savings in cash or laddered maturity bonds.

By the time you are in your 40s, you are reaching your career midpoint, moving toward your peak earnings potential. It may be time to invest in real estate for a home. It makes sense to dial up bonds closer to about 30%, with equities comprising around 70%. It is also smart to invest in yourself by working on an advanced degree or building work skills.

In your 50s and 60s, you might continue to dial down on risk, possibly moving to a 50/50 stock/bond complement. Specific percentages depend on when and by how much you intend to eventually tap your nest egg. The ratio also reflects your individual risk comfort level.

Each investment age is tailored to how much progress you are making toward your retirement goal. As you prepare to retire, you may restructure the portfolio to deliver income streams by shifting to higher dividend-paying stocks or bond funds.

Risk tolerance

There is no single ideal allocation strategy. The optimal portfolio at any given time is only confirmed with hindsight. The first prerequisite of a valid allocation is that the portfolio holder can stick with it through market ups and downs, which hangs on their risk tolerance. Many investors overestimate their emotional staying power, at least until a sickening market decline, such as in 2008, when the S&P 500 cratered by 57%. Those who panicked and sold during that crash might have been better served by a more conservative allocation mix that could have kept them invested.

Those in or nearing retirement normally avoid taking unnecessary risks for the sake of extra marginal gains. They can reduce the equity portion of their holdings, regardless of their risk capacity or tolerance.

As they start withdrawing funds, however, they face sequence risk: When withdrawals are no longer being replenished, their portfolios may suffer more in bear than bull markets, since bear withdrawals represent proportionately more of their assets.

Gliding toward your target

You can use target date funds, aka lifecycle funds, to eliminate the guesswork. These vehicles do the homework, automatically shifting allocations toward more conservative holdings in line with an investor’s age. A glide path formula calculates the adjustments over time.

Or you could create your own glide, using the 100 rule. The formula states: 100 minus your age is your bond allocation, with the remainder earmarked for stocks. For example, if you are 35, you would hold a 65/35 stock/bond mix.

Overly conservative, long-lived investors risk running out of money. With rising life expectancies, the 100 rule has now moved up to 110 or 120. The Social Security Administration pegs the average 68-year-old woman’s life expectancy today at 86.6. If a 40-year-old follows the updated rule, they might invest 80% in stocks and 40% in bonds, as 120 minus 40 equals 80.

Your financial adviser can help you plan an asset allocation mix according to your age and risk tolerance.

Copyright, 2023

Did you enjoy reading, Allocating Assets by Life Stage?

 Interested in learning more about this subject? Attend our upcoming estate planning webinars!

Have You Properly Protected Your Loved Ones? (FREE Estate Planning Workshop), Trustee and Power of Attorney Training School Webinar, Medi-Cal Webinar, Probate Webinar, and our What To Do When a Loved One Dies Webinar Series. Get registered today for our estate planning webinars!

This website is not intended to be a source of solicitation or legal advice. General information is made available for educational purposes only. The information on this blog is not an invitation for an attorney-client relationship, and website should not be used to substitute for obtaining legal advice from a licensed professional attorney in your state. Please call us at (626) 403-2292 if you wish to schedule an appointment for a legal consultation.

For more information about The Hayes Law Firm, visit our Google My Business page.

Thanks for reading, Allocating Assets by Life Stage!

• Author
• Recent Posts

William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

Latest posts by William Hayes (see all)

• Is This Your Situation: You’re Worried About Probate - October 2, 2023
• Avoid These Top Trust Problems - September 18, 2023
• Should I Leave My Child A Buck? - September 12, 2023