What Is Asset Allocation — And Why It Matters After You Retire

Transcript

Hi, I’m Brent with Scottsdale Wealth Advisory. If you’re getting close to retirement or already there, you might be hearing terms like asset allocation thrown around. But what does that actually mean? And more importantly, why does it matter when you’re no longer working? 

In this short video, I review what asset allocation is and why getting it wrong in retirement can cause catastrophic problems.

What Is Asset Allocation?

So let’s start with the basics. Asset allocation simply means how your money is divided between different types of investments. The most common investments are stocks (which are growth-oriented), bonds or fixed income (which are more conservative), and cash or cash equivalents like money markets or CDs.

How Annuities Fit Into a Retirement Portfolio

In our practice, we often use annuities as a bond alternative for safe income-generating portions of our client’s asset allocation. They can provide stable, reliable income, something bonds used to do more effectively in the past with the Carter and Reagan day interest rates. So for clients who are more focused on preserving wealth and generating income, annuities can be helpful in that middle bucket that we talked about in the last video.

Shifting From Accumulation to Preservation

Now, when you’re younger, you’re typically overweighted in stocks because you’ve got time to ride out the ups and the downs of the market. This is the accumulation phase of your life. But in retirement, the game changes and very few financial advisors coach us on how the rules change.

You’re no longer building your nest egg. You’re not in that accumulation phase of your life. You’re in the preservation and payout phase because that paycheck you learn to rely on every two weeks by direct deposit, it’s gone and it’s never coming back.

Why Your Retirement Allocation Needs to Reflect New Priorities

That means your allocation needs to reflect a new priority, protecting what you’ve built and maximizing the income from it while still keeping up with inflation. But here’s the problem I often see: too many retirees are either too aggressive or too conservative.

The Risks of Being Too Aggressive in Retirement

Being too aggressive will at some point expose you to major losses by no fault of your own. If this happens early in retirement due to nothing other than timing and luck, especially when you’re starting withdrawals to pay the bills, you may never recover. This is what’s referred to as the negative sequence of returns. Look it up. Google it. The success in your retirement depends on it.

The Downsides of Being Too Conservative in Retirement

Losses early on can do more damage than most people realize. And the flip side, being too conservative might feel safe, but it can leave your money growing too slowly. And that’s a problem when retirement could last 20 or 30 years.

Finding the Right Balance in Retirement Investing

So that’s why having a balanced allocation matters so much. We’re talking about finding the right mix of growth, income, and stability that suits your lifestyle, health, and goals. 

And here’s the key: your asset allocation shouldn’t be set in stone; it should be reviewed regularly and adjusted as your life changes. 

What Is the Rule of 100?

So if you’re wondering, how much risk is too much? Or what’s the right balance for me at this stage? That’s what we’ll cover in the next video.

We’ll walk through a simple tool called the Rule of 100 and explain how it can help you determine a starting point for your own allocation. It’s quick, it’s easy to understand, and it’s especially helpful if you’re feeling unsure about how your money is positioned right now. 

Free Financial Coaching Available

And if you still have questions, reach out to schedule a free financial coaching session. Thanks for watching.