by Jac M. Arbour CFP®, ChFC®
President, J.M. Arbour Wealth Management
The markets are volatile, interest rates are rising, both stocks and bonds were down in 2018, and an unprecedented 93% of asset classes experienced a loss. There was seemingly nowhere to turn to make a few bucks in 2018, and it’s no wonder that people want to be especially thoughtful about how they allocate money in 2019, specifically within their retirement accounts.
The most important thing to remember when allocating money in a retirement plan is exactly that: it’s a retirement plan, which means that the money is for later. Keeping this in mind, here are a few things to consider when allocating your funds.
Time Horizon: There are two primary timelines to consider. The first is how many years until you will begin using the money in your retirement account. The second timeline is the income period. How many years do you expect to draw on this account? Also, in what fashion will you draw on it, meaning will you take random disbursements, or will you take a set amount each month to supplement other forms of income such as Social Security and/or pensions? The closer you are to retirement and the more you rely on these funds, typically the more conservative you should be when it comes to taking on market risk.
Investment Objective: Are you aiming for aggressive growth, slow and steady growth, an income portfolio, or will this be a legacy account designed for loved ones? Getting clear on the purpose of this account is important because it will dictate how the funds should be best invested.
Risk Tolerance: Any allocation you select is accompanied by numerical measurements of risk, including beta and standard deviation. If you are unaware of these measurements, ask your plan advisor to explain how each relates to portfolio expectations. Once you know, ask yourself if such expectations align with your needs and goals.
Target Rate of Return: The allocation you choose will dictate the returns you receive, and it is these returns, along with your contribution rate (see below), that will determine the value of your account when you arrive at retirement age. This means the rate of return affects the number of dollars you will be able to withdraw each month for the rest of your life. Be sure to speak with your advisor to make sure every decision you make will help to keep you within this target. The longer the time period you have until retirement, the more likely you will be able to hit your goals with small tweaks to the plan.
Contribution Rate: I can’t say it enough. Too many people choose an arbitrary percentage or dollar amount when contributing to their retirement plan. It is important to remember that, one day, you will stop receiving paychecks but will still need money, which means the important question to ask is, How much money will I need? When you are deciding on an amount to invest from your paycheck each pay period, be sure to learn what the account value is estimated to be at the time you retire, based on that contribution rate. Do your best to ensure it is enough to truly meet your retirement income needs.
There are many things to consider when investing in a retirement account, but these points are a great way to start the conversation. If you ever have questions, please reach out to one of the pros at JMA or discuss with your plan advisor.
See you all next month.
Jac Arbour is the President of J.M. Arbour Wealth Management. He can be reached at 207-248-6767. Investment advisory services are offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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