Happy New Year! My wife and I were discussing New Year Resolutions the other day. She thinks I eat too much sugar and should resolve to eat less as the federal government changed their most recent Dietary Guidelines to recommend consuming less sugar. I listened to her suggestions attentively while snacking on Hot Tamales and Mountain Dew. This discussion made me think about how investment ideas also change over time. It's important to reflect upon old and new ideas and update our thinking as new information comes to light. Here are some old investing rules of thumb that you may have heard over the years and the new thinking that has replaced them.
The allocation between stocks and bonds in your portfolio can be determined by calculating 100 minus your age. The thinking is that as you age, you would invest less in stocks and more in bonds to make your portfolio less risky over time.
Investing strategy is not "one size fits all." Everybody has different risk tolerance levels and life situations, and there are many pieces that combine to make up the larger picture of appropriate asset allocation, which is one of the most important decisions you make when it comes to your portfolio. I recommend consulting a financial advisor to come up with your allocation, and once you do, rebalance that allocation periodically (see this article
) on rebalancing for more details). At WT, we also offer a great tool called Riskalyze that will help you think about your approach to risk. Email me and I'll send you a customized link, and we can then have a discussion about the allocation that is just right for you.
You will need 80% of your current income in retirement. The idea is that when you retire, your expenses will decrease as you probably paid off your mortgage, won't have kids living with you, and won't have to save for retirement.
You may need just as much or more income in retirement than your current level. Reasons for this include increased medical expenses, extensive travel plans, and increased leisure time (which can translate to increased shopping). Knowing how much income you will likely need will come from planning and budgeting. I have a handy Retirement Budget Template
in the "Resources" section of my page you can use to calculate the amount.
You can plan on your portfolio earning 8% (or more) in the long-run. Historically, the S&P 500 has averaged approximately 9.5% annual returns.
Don't forget that you must also account for inflation and fees which can average 3-4%. The fact is you can't control stock market returns or inflation rates, but you can control your savings rate. I wouldn't want you to save at a lower rate, assuming you will earn higher returns, and not be able to retire when the time comes. I recommend being more conservative with your assumptions in retirement planning and using a return commensurate with your risk levels. I'm guessing you won't be too upset if you end up with more money than you planned.
I will retire on my inheritance.
According to a 2018 Charles Schwab study, 53% of young people ages 16-25 believe their parents will leave them an inheritance compared to an average of 21% of people who actually do receive an inheritance. Retiring on an inheritance only works as long as your parents die on schedule and don't leave behind legal, medical, or other bills. Since that is impossible to guarantee, my advice would be to save and invest for your retirement without assuming you will receive an inheritance.
I want you to know that I am continuously reading, researching, and discussing investments to ensure we are keeping up with the latest thinking and best ideas for managing your portfolio. You can rest assured that I use the most reliable, sound investment principles in my approach to your investment strategies. And, I am always happy to discuss any investment thoughts you may have, whether they are old or new. Let me know if you'd like to meet – the Mountain Dew is on me.
If you have questions or if you would like to discuss investment thinking with me, you can e-mail me at email@example.com
or call (520) 204-1058
Matthew J. Haertzen