How To Plan Your Retirement Funds?

By: Ito Nakamura
Submitted: 2007-01-17 16:17:26
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The best way to plan your retirement fund nest egg is to layout an investment roadmap early in your career life. Mapping out each phase of your life the important investment portfolio you should have. Financial advisor recommends a multistage retirement path which needs a multistage approach to investing. In the first stage, you could be begin with some income from part-time work or side income after retiring from your main career. That steady secondary cash flow means you’ll need less income from your portfolio, allowing you to invest aggressively for growth. Even if you retire at 60, you could still have 20 to 30 years ahead of you. Most financial advisor agrees that you need to be a long-term investor.

Once you have entered the second stage of retirement, in which you retire from work completely, you will need more portfolio income. But financial advisor suggest that you need not invest in bond too aggressively. Bear in mind that we are coming off a 20 year bull market in bonds in which investors were rewarded with both income and capital appreciation that came from falling yields. As interest rates fall, older and higher yielding bonds became more valuable. Now that long term government bonds yield less than 5 percent, so there is not much to gain.

Seriously speaking, financial advisor recommends that retiree really need a strategy that is a bit more sophisticated – particularly if they want their money to last through the third or sunset stage of retirement. This is more evident with raising health care and living costs.

As such, financial advisor recommends that you invest in the following portfolio:

1. Midcap stocks 10%

2. Small cap stocks 10%

3. International stocks 10%

4. Short-term fixed income 30%

5. Large cap stocks 40%

Your retirement nest eggs should continue to grow with the stocks market while the bonds cover living expenses. In order to achieve success in retirement finds investing; one thing everyone should do is not to procrastinate in your aggressive retirement funds investment planning. Some people view retirement as some event that is too distant and don’t save enough. But once they hit retirement age, suddenly they realize they don’t know anything and too late. You need to know how to plan on living, and you need to plan on living longer!

That comes to another important financial planning knowledge; how to manage longevity risk.

What is longevity risk? Simply state longevity risk is the possibility that you’ll run out of money before you die. Most people start retirement without realize that their portfolio isn’t big enough. So what’s the solution? Save more when you’re working. As you approach retirement, you’ll need to reconcile your budget with your portfolio. For example, if you expect your annual expenses to be around $50K, then according to scientific financial calculation you may need at least $1.25 million in order to satisfy your expenses. Also depending on many factors, such as marker performance, life expectancy, you may not able to withdraw a large sum out of your investment. If you want your portfolio to last a life time, financial mathematics show that you may not withdraw more than 4.5% per annum; assuming your portfolio carries at least 60% in stocks.

Financial advisor recommends retiree to invests in both short-term and long-term growth. One of the recommended investment strategies is to invest five year or more of living expenses in high quality bonds, some which will mature every year. For example, you may buy $50K worth of 1 year bond, $50K worth of 2 year bonds and so on. This strategy ensures that retirees will have income every year, plus access to the principle as each bond or group of bonds matures. You may then sell some stocks to repurchase another year worth of bonds set to mature in another 5 years. However, what happen if your portfolio suffers a bad year or two? In this case, you should hold off selling stocks; and if you have gains in any year, then you may invest in more years ahead. The rest of your portfolio can then be growth-oriented invested entirely in stocks. Another way of investment is to buy an immediate annuity with big enough payout to cover costs from health care insurance, taxes and living expenses.

However you may want to wait until your second or third stage of your retirement before you purchase an annuity, because the payout is larger for an older buyer.

Article source: Expert Articles