ASSET ALLOCATION FOR RETIREMENT PLANNING

As you build your investment plan for retirement income, your investment time horizon will change throughout your lifetime, and your asset allocation strategy should change accordingly.

When you are in your working years, your investment time horizon for retirement planning is longest—as much as 60 years if you are in your 20s.  Now is the time to accumulate as much capital as you can by focusing on high-return investments: your long time horizon will allow you to ride out temporary market fluctuations and take advantage of the historically long-term growth potential in the stock market.

As you approach your retirement, your time horizon begins to recede.  Your asset allocation strategy in your 50s might be to gradually shift a portion of your capital from stocks to bonds, so that you can continue to make good gains on your investments while beginning to protect the resources you will need to live on in a few years.

When you finally do retire, you may need to start drawing funds from your investments to meet living expenses.  Protecting your capital by shifting an even greater portion of your investments to low-risk assets becomes more important—but remember that your retirement may last twenty or thirty years.  To ensure that you will continue to have enough, and to protect your nest egg from the corrosive effects of inflation, you will need to keep some portion of your capital in growth-oriented assets like stocks.

As with college and retirement planning, the investment time horizon impacts asset allocation decisions.  Next, we will look at how this effect applies to other investment goals.