Seniors – Keep Your Allocations

Senior woman meeting with agentMany, if not most, financial institutions, advisers, and planners recommend very conservative strategies for those nearing or in retirement. Take their generic advice at your own risk! Most likely they are just trying to avoid liability and cover their you know whats. What YOU need in YOUR asset allocation model may well be very different from their generic recommendations.

I’m keeping my allocations.

I’ve ignored most of them, successfully to this point. Having lived through the stagflation in the 1970’s, I can easily picture a future where inflation soars. I spend $100 a week now on groceries for the two of us. I wouldn’t be surprised to be paying $400 or more a week before I die. If I had to live on fixed income without any growth in my base portfolio, I would end up eating Ramen noodles the last years of my life – a fate I prefer to avoid.

Examples of financial advisor suggestions that would have steered my family wrong:

An estate trustee at a bank recommended selling off Chevron stock that my Aunt owned “because it is too risky”. Thank heavens she had sense enough to ignore that advice. In the years since that recommendation was given, the stock has consistently paid a dividend and the stock price has tripled in value.

Vanguard’s Personal Financial Planner thought I should change invest all my retirement money in bonds when I moved it from my 401K to an IRA. The bond market was at a high at the time. Stocks were cheap. I bought stocks and a few bonds. My retirement portfolio has grown over $100,000.

Merrill Lynch Financial Advisers recommended I re-allocate to a ‘more appropriate’ conservative position. They made this recommendation without knowledge of all my other investments (held at other institutions). The international mutual funds they wanted me to ditch are part of my overall asset allocation strategy.

My asset allocation model.

For years I’ve been striving to achieve a mix of 30% bonds, 15% mid/small cap stocks, 15% international and 35% large cap stocks with the remaining in cash. I’m 65, retired, and still striving for that mix. I see no reason, in our financial situation, to alter that strategy.

Disclaimer: I am not a professional and am not attempting to coach anyone on the proper asset allocation for their situation. The whole point of this post is that each of our situations is unique and requires a thoughtful, individualized approach to allocating and investing.

Everyone’s situation is different and while some financial professionals attempt to account for that, they all must provide sound and sensible advice, yet still cover their derrieres.

Some of us do truly need a very conservative asset allocation model. My in-laws were such people. They retired on the husband’s Social Security with only around $60,000 in investable assets. They couldn’t afford to take any risks at all and consequently used a very conservative model, holding all money in treasuries of various sorts or in the bank.

In our case, my spouse has a federal pension adequate for all of our expense needs. In addition, we have multiple other income sources – an annuity, my businesses, our condo rentals, dividends and capital gains. In the near future, I will also begin taking my Social Security. Even if both the pension and the Social Security payments were removed (which I think is unlikely in our lifetime), we have enough in assets to live out our lives at our current lifestyle levels.

Our model works for us.

Why would I risk putting most of our investments into non-inflation protected ‘conservative’ income producing investments such as bonds? Why would I not want to have some part of them invested in emerging markets and in international mutual funds to take advantage of growth in other parts of the world and balance risks of investing solely in the USA? I don’t necessarily need more income. That would just cost me in taxes!

Why is the American Association of Individual Investors site still labeling me as a conservative investor, based on my age and presenting a very conservative model for my age with 50% of my assets to be in bonds and nothing at all in emerging markets.

Sure, we need some fixed income bond type investments, but we also need growth type investments to keep up with the coming inflation. My spouse will live a long time, his Mother is going strong at 91 and his Father lived to 85. We need to make sure our base grows over his lifetime, especially since we hope to leave a legacy to our children and grandchildren.

The need for individualization is being recognized.

We are all different, with differing financial situations, goals and tolerances, but we are all statistically living longer as well.

Some advisors and institutions are recognizing the need for better advice because of that.

CNN Money is one site that acknowledges this. They have a decent calculator to help you get close to your asset allocation model goal.

The Fool in Investing Your Nest Egg Foolishly starts to recognize a new order when they say:

Typical “convention wisdom” held that the way to allocate money was to subtract your age from 100, and devote that portion to stocks. Therefore, a 50-year-old would have 50% of her portfolio devoted to stocks. A 70-year-old should only have 30% devoted to stocks. Then, as we know, people started living longer, and the number to subtract from became 110. Perhaps there is some vague broad-stroke sense to that, but in reality, as retirees we must determine the allocation that allows us as individuals to sleep well at night while still generating the income and portfolio growth required for the rest of our lives.

But Wells Fargo nails it on their site in Asset Allocation by Age and Risk Tolerance, saying:

With life expectancies reaching into the 80s, it’s quite common for a person to live 20 or 30 years beyond retirement. As a result, it’s still important to own some stocks for growth. Investment expert Chuck Carlson, author of the book Eight Steps to Seven Figures, suggests subtracting age from 110 to determine the percentage of stocks that should be held in a portfolio. For example, a 50-year old would hold 60 percent of his or her investment portfolio in stocks. The remainder would be divided between bonds and cash.

But it’s not that simple. The asset-allocation decision is also dependent upon a person’s attitude about risk. There are some 60-year-olds who prefer to concentrate their holdings in stocks because they have a large portfolio, few financial responsibilities, and don’t mind the volatility. On the other hand, there are some 40-year-olds who are not comfortable with the ups and downs of the stock market. Attitude toward risk is a very personal decision.

Do you use an asset allocation model? How did you come up with it?


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