Retirement Portfolio Allocation Strategies
Retirement Portfolio Allocation Strategies
Retirement Portfolio allocation is the diversification technique aimed to balance the risks by allocating your funds to different sectors, countries, currencies and asset classes.
Firstly, the well-known rule for retirement portfolio allocation is that you should keep the share of your assets in stocks calculated by following formula:
100%-[Your Age]%=[xx%], where XX% should be kept in stocks
For example, your age is 70. 100%-70%=30%. The older you become, the less percent of assets should be allocated to stocks and the less risk you can afford to take. This model is designed to ensure happy and worry-free retirement. Nevertheless, people in developed countries live longer and longer. That’s why many financial advisors currently recommend to extend 100% to 110-120%, according to CNN Money.
Some retirees prefer to hold up to 10% of their retirement portfolio in stocks. Others select more aggressive allocation options with moderate or even high level of risk. However, high-risk investments are not recommended for retirement portfolio. This traditional approach is referred to as the Bucket system to retirement portfolio management.
A common-sense strategy for cash allocation:
5% of your portfolio to cash, but large number of recognized experts may prefer to keep at least 10-15% cash on hand.
How to find your best strategy for retirement?
Generally, there are following major factors that have impact on investor’s decision before he/she start:
Risk tolerance. Are you comfortable with day-to-day volatility? If not, adding bonds to your portfolio can reduce the risks, extend income and growth potential.
Time. How many years do you have to invest before you need access to retirement savings? The more time you have to invest, the higher share of your investment portfolio should be weighted in stocks that tend to be more volatile over the short term but outperform other asset classes over the long term.
Acceptance of newest technologies. If you are ready to take the risks, you should consider investing smaller share of your savings to digital assets or revolutionary technologies that have strong growth potential for next 5-10 years. If you do not accept taking too much risks, you should take a look at Index Funds and Passively Managed Funds.
Asset allocation and diversification are the key to managing risk. Your wealth manager or financial advisor can help you create and fine-tune the right mix of assets that makes sense for your risk tolerance, retirement financial goals and time horizon.
But portfolio rebalancing during a volatile market that swings widely over a few days can be a challenge. For example, within one week in March 2020, the S&P 500 Index went down 7.6% one day and up 9.3% another day, before falling 12% a few days later. We suggest you to select one day each year to review your asset allocation and rebalance your retirement investment portfolio if necessary.
Best ways to start retirement allocation
Own research. If your investing experience if at least above average, you can do your own research and select assets and asset classes for allocation by historical performance and indicators to potential growth in the future.
Robo-advisor. Great cutting-edge tool that will pick the right assets for your portfolio according to your risk tolerance, time horizon and objective.
Financial advisor or wealth manager. Traditional and time-tested way to start building investment portfolio. Stay sure that your wealth is managed right by trustworthy industry professionals.
Retirement Allocation to Mutual Funds and Stocks
Equity investments have historically outperformed debt and other types of investments. To achieve your financial goals, you need to be prepared to hold your stocks for long period starting from 15 years. According to historical performance, Mutual Funds are one of the most income-producing options, including Balanced Mutual Funds that typically offer comparably low returns. It’s very important to regularly rebalance portfolio to reduce the risks, maximize returns and minimize drawdowns. On top of that, some of mutual funds offer investors monthly income distribution. Such factor makes this type of investments a source of monthly income in retirement.
Structuring your retirement investment portfolio starts with review of your income needs. Offshore investment opportunities open unlimited access to international markets. Overseas retirement allocation is also enabling investors to make their investments tax-efficient through allocation to offshore jurisdiction. This can be Cayman Islands or BVI, where the most of recognized offshore mutual funds are domiciled.
Retirement allocation for expats
That’s also a great choice if you live outside of your home country after retirement and are looking for investment products for expats. On top of that, investing offshore may significantly enhance your returns because of tax-efficient law of offshore jurisdictions. Such types of investments become more and more popular among both beginners and well-experienced investors.
With Einvestment, you may get more from your savings with selection of broadly diversified investment products built for monthly income. The Fund has outstanding performance history since inception in 2018. Portfolio managers are picking the right asset mix to deliver risk-adjusted returns in line with investor’s risk tolerance. In addition, Einvestment charges a discounted performance fee from retired investors. If you are looking for low-risk investments, the Fund has a conservative investment portfolio for investing with a low-risk.
Since the income to meet retirement needs comes from multiple sources, investors should evaluate retirement allocation based on expanded portfolio that includes the value of all income-producing assets. In conclusion, we encourage investors to always maintain a strategic allocation to international markets regardless time horizon. Moreover, past researches conclude that international stock diversification reduces the volatility of one-year returns. However, retired investor’s international exposure should consist mostly of developed markets stocks. The minimal share of emerging market exposure is recommended for the right risk/return balance.