Retirement planning is a lot like politics. Not only does everybody have an opinion but they may also believe that everybody else’s opinion is either flat-out wrong or based on ulterior, often unscrupulous, motives. There may be a reason for these heated debates and that reason may have a very objective and logical source and it’s a fact that far too many people forget.
Retirement Planning – The Three Secret Words
You might not care what a friend at the dinner table has to say about retirement planning but if you’re evaluating a financial advisor, you need to listen for three words in their opinion: “depending on age.” A fine-tuned retirement portfolio doesn’t involve buying Apple stock and government bonds and forgetting about it until it’s time to draw from the account. The weighting of your portfolio changes as you get older and anybody who has an opinion that is important to you should understand that.
Five Retirement Components
You may not need each of these five retirement components but remember that even if you have a financial advisor, you’re the one who has to live off of this money in the future. For that reason, you should have an educated opinion of each of these components
These stocks are the LeBron James of stock market. They’re good but they still have a lot of room to get better. The best known growth stock of the 21st century may be Apple. Although the stock currently trades at more than $300, Goldman Sachs believes that it may go north of $500.
Growth stocks could also fall as fast as they grew so a higher weighting of these names is appropriate for portfolios of those who have decades left before drawing funds. If you’re only a few years from drawing funds, safety is the key.
Dividend stocks pay you to wait. Dividend stocks like Exxon don’t have a significant amount of growth left in them but they don’t have nearly the downside risk either. For those who hold a dividend stock long enough, the dividend payments eventually reduce the price paid for the stock to zero. Dividend stocks are perfect for middle aged workers who still have a decade or slightly more but need less risk exposure.
A corporate bond is a loan to a company. In exchange, they pay you interest. Corporate bonds are fixed income investments but they do come with a degree of risk. What if the company files for bankruptcy? What if the bond is called or interest rates rise drastically? Still, the degree of safety is higher than stock investments which makes corporate bonds a highly weighted option in the portfolio of an older worker who will draw on funds within 10 years. Still, with good management, corporate bonds have a place in every portfolio.
Treasuries and Government Debt
United States debt is arguably the safest investment in the world and there are a lot of ways to invest. Treasury bonds, bills, and notes are a safe option but at current interest rates below 3% on all of these investments, under performing the rate of inflation over the long term is a real possibility. Short term government debt is good for those retiring within a short period of time but at current interest rates, there are many better options for most people.
Index funds follow one of the many indexes or collections of products. The most common are stock indexes that follow the performance of a well-known index like the S&P 500. Since stock index funds have the same risks as individual stocks, these should have a smaller weighting as a person approaches retirement age.
Opinions on the amount of weight put on these products varies considerably but most important, the weighting changes over time. If a retirement portfolio is started in a person’s late twenties or early thirties, the weighting of their portfolio should almost completely invert by the time they reach retirement age but even that fact is a matter of debate depending on future market conditions. It is also important to note that the above components may come to you packaged in a mutual fund, ETF, or individually with each of these packages having their own positives and negatives.