Portfolio Balance, Investment Strategy, and Sources of Retirement Funds
I'm hopefully about four years away from retirement. I have a good salary and, looking out to 2023, I think I'm in good shape overall. There will be three main sources of funding for the retirement years.
1. Wife's and my 401ks and IRAs
2. A lump sum retirement contribution from my employer
3. Social Security
1 and 2 are about equal right now, 3 is a fixed future monthly payment.
The stock market has been hot since the crash of 2008. The Dow is now around 25,000. How much higher will it go? Is it going to crash? Would it be wise to transfer some funds from stocks into cash or bonds?
My first thought was Yes, of course! But, I did a little digging on this and one piece of advice was that people approaching retirement should have a couple years worth of cash in their accounts so they don't have to sell stocks in a down market. That makes a lot of sense, I have seen literature that shows how a stock market decline immediately following retirement can demolish retirement plans.
But then a realization hit me. My lump sum and social security future payments are, in essence, cash funds. They have little risk and little potential for appreciation. So I have the cash reserves available at retirement. In fact, with this realization, I am quite overbalanced in cash. My 401k portfolio has always been on the "risky" side, i.e. geared for appreciation. Financial advisors through the years have advised me to ratchet down the risk and invest in bond funds, etc. This didn't make sense to me--mainly because with interest rates at 0%, bond funds were likely to decline in value. Yes, you get interest payments, but that gets offset by value depreciation as interest rates increase.
So this realization that I already have over 50% of my retirement funds in cash was freeing. I consciously realized for the first time that my "risky" investment strategy was actually rational and, in fact, quite conservative.
I understand that defined benefit retirement programs (like my lump sum) are increasingly rare in the corporate world today, but people do get inheritances, life insurance, and other possible (usually sad) surprises as well. So this is a way to think about the potential for those as well.
And by the way, when you are highly confident that the market is heading for a fall or is very low (i.e. it is at a bookend, you should consider making some moves in the buy low sell high framework. Don't bet everything on a market turn, but don't ignore it either.
1. Wife's and my 401ks and IRAs
2. A lump sum retirement contribution from my employer
3. Social Security
1 and 2 are about equal right now, 3 is a fixed future monthly payment.
The stock market has been hot since the crash of 2008. The Dow is now around 25,000. How much higher will it go? Is it going to crash? Would it be wise to transfer some funds from stocks into cash or bonds?
My first thought was Yes, of course! But, I did a little digging on this and one piece of advice was that people approaching retirement should have a couple years worth of cash in their accounts so they don't have to sell stocks in a down market. That makes a lot of sense, I have seen literature that shows how a stock market decline immediately following retirement can demolish retirement plans.
But then a realization hit me. My lump sum and social security future payments are, in essence, cash funds. They have little risk and little potential for appreciation. So I have the cash reserves available at retirement. In fact, with this realization, I am quite overbalanced in cash. My 401k portfolio has always been on the "risky" side, i.e. geared for appreciation. Financial advisors through the years have advised me to ratchet down the risk and invest in bond funds, etc. This didn't make sense to me--mainly because with interest rates at 0%, bond funds were likely to decline in value. Yes, you get interest payments, but that gets offset by value depreciation as interest rates increase.
So this realization that I already have over 50% of my retirement funds in cash was freeing. I consciously realized for the first time that my "risky" investment strategy was actually rational and, in fact, quite conservative.
I understand that defined benefit retirement programs (like my lump sum) are increasingly rare in the corporate world today, but people do get inheritances, life insurance, and other possible (usually sad) surprises as well. So this is a way to think about the potential for those as well.
And by the way, when you are highly confident that the market is heading for a fall or is very low (i.e. it is at a bookend, you should consider making some moves in the buy low sell high framework. Don't bet everything on a market turn, but don't ignore it either.
