SHOW NOTES: 2019-10-03 MiM

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Last Week’s Question of the Week: Does a No-Load fund charges a commission?

ANSWER: No, since a finance professional is not involved, there is no commission charged.

HOST: If my retirement is coming up in the next few years, what should I know about properly allocating my retirement investments?

KLAAS FINANCIAL: Yes, this is very important. Once we determine WHEN is the best time to retire, we really want to make sure that we don’t get this part wrong.

We all want to enjoy a comfortable, financially secure retirement. But saving for the future isn’t enough; you need to develop an ideal asset allocation strategy so that your investments allow you to achieve your long-term goals. This means ensuring that your portfolio should probably contain a healthy mix of stocks, bonds, and even some cash. YOUR strategy will depend on a number of factors: anticipated retirement length, tolerance for risk, income changes due to loss of a partner etc.

What should your asset mix look like? Stocks, which are more volatile than other investments but have historically delivered the highest returns. Bonds, which are a less risky, income-producing investment that typically offer higher returns than cash but lower returns than stocks. Cash, which is generally a risk-free investment but offers little in the way of returns, especially in today’s interest rate environment.
5. A target date fund (TDF) – also known as a lifecycle, dynamic-risk or age-based fund – is often a mutual fund or a collective trust fund, designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches. Also called lifecycle funds.

According to Morningstar total assets in this sector topped $1.7 trillion at the end of 2018 — getting close to a quadrillion dollars! At the end of 2018, there were roughly 39 firms offering target date funds. Keep in mind that Target-date funds are designed for the average investor, but few investors are truly average.

HOST: How should I change my asset allocation change as I approach retirement?

KLAAS FINANCIAL: For years, a commonly cited rule of thumb has helped simplify asset allocation. It states that individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities. However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age. That’s because if you need to make your money last longer, you’ll need the extra growth that stocks can provide.

But be careful because no one is TYPICAL. When retirement is near your goal leading up to retirement should be to continue growing your assets without taking on too much risk — the reason being that the likelihood is you will be needing access to your investments relatively soon, and you don’t want to run into a situation where your portfolio value takes a major dive just as you’re about to dip in. Biggest factors that can affect an individual’s asset allocation, both leading up to and during retirement, is the presence of other in-retirement income sources, above and beyond what the portfolio will supply. This would be Social Security, pensions, spouse’s working income or their retirement sources, or perhaps even fixed annuities.

If those stable income sources will supply most or all of your needed income in retirement, your risk capacity is high, you should be able to withstand a higher equity weighting, at least in theory. The reason that making one-size fits all asset allocation is so difficult is that no one but you know all of the pieces of your financial life. (This is why a financial advisor can be so valuable, in that he or she can make recommendations based on your own variables.)

Ideal strategy for you depends on your tolerance for risk. Though most pre-retirees are advised to start shifting their assets into safer investments, like bonds, if you happen to have a higher-than-average appetite for risk, you might maintain a more stock-heavy portfolio.

HOST: So how much do I need to keep in stocks and bonds in my portfolio?

KLAAS FINANCIAL: There is no single correct stock-bonds ratio that’s right for all people, but we would suggest that it needs to provide for enough long-term growth (especially for a possible long retirement), while also affording at least some downside protection. Normally we would see people limit stock holdings to 40-60% of their portfolio.

The most important reason to continue to hold bonds is that, rising rates or no, bonds still fulfill what for long-term investors is their most important function: They act as a barricade against the volatility of the stock market. In general, remember that bonds serve three primary purposes in portfolios: to generate income, preserve principal and dampen the volatility of other asset classes. Keeping a diversified portfolio of bonds that includes both government and investment-grade corporate issues with a broad range of maturities, the potential bond losses aren’t likely to be anything close to the downdrafts of 50% or more that stock investors have had to endure in past bear markets.

Make sure to adjust that strategy once retirement begins. Your portfolio should never be something you set and forget, and the more you keep tabs on it, the better your investments are likely to serve you in the long run. Be smart and keep a reasonable emergency fund of CASH going into retirement that is completely outside of your retirement portfolio.

HOST: Now, let’s look to our Money in Motion Listener Question Corner, where one of your listeners, Kerrie, asked this question: “How do I know what amount I will receive from Social Security when I retire in a few years?”

KLAAS FINANCIAL: The best resource, Kerrie, is the Social Security website at SSA.GOV. You should be able to set up an account online and then be able to see what your current benefit is looking like. If you are married or were previously married this could affect the amount of your benefit, as well as if you did not earn enough credits to qualify for a benefit in the first place. You can also set up an appointment with your local Social Security office. Their phone number is, 800-772-1213.

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Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.