Retirement asset allocation involves dividing assets among different classes based on risk tolerance and investment horizon. A well-diversified portfolio includes stocks, bonds, and annuities. Allocate assets to balance risk and income requirements.
Asset allocation involves dividing an investment portfolio among different asset classes. Retirement asset allocation allocates your assets across different asset classes with the goal of protecting your finances after you retire. The best way to allocate your wealth in retirement largely depends on the amount of financial risk you are willing to tolerate, as well as your investment horizon. Risk tolerance measures the stability of an investment; An investment horizon is the amount of time you intend to invest your money in a particular asset.
Investment objectives are always individualistic, as will be the allocation of retirement assets. Start by deciding how much risk you want your investments to be exposed to. For a retirement nest egg, your investment strategy will most likely be risk averse, meaning that the portfolio includes less risky investments in order to preserve your assets and generate income for many years. Portfolio diversity is also extremely important in allocating retirement assets. Splitting your financial assets across different asset classes protects your investments from systemic risk, which is risk affecting every security in a market, not just a specific company or financial product.
After determining the degree of risk your portfolio should be exposed to, choose stocks that will create the returns you expect. If your retirement asset allocation can tolerate more risk, invest in stocks or more volatile investments. A retirement portfolio may be more risk tolerant if it won’t be your sole source of income during retirement. If you plan to fund a substantial portion of your retirement with a retirement portfolio, invest in bonds, money markets, or annuities.
A well-diversified portfolio includes a mix of assets, including stocks, bonds and, for a retirement plan, an annuity. Annuities are contracts between individuals and insurance companies and are widely used to fund retirement. The individual pays regularly into the annuity, which grows over a predetermined period of time without taxation; when it expires, the insurance company returns the funds to the investor at regular intervals, taxing them as income. The allocation of pension assets to bonds is often stable but not guaranteed.
Stocks have the potential for the greatest return on an investment, but are also more volatile. Bonds are less volatile than stocks and offer lower yields. For stability, allocate more of your assets to bonds rather than stocks. Perhaps the safest of all investment categories is cash and cash equivalents. These include savings accounts, certificates of deposit, treasury bills and money market accounts. Allocate your retirement assets in a way that balances your risk and income requirements.
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