Investors who do their own financial planning often rely on industry standards. Similar to those who rely on investment adages for their asset allocation, these investors are missing out on advice that is tailored to their circumstances and goals.
One common thought is that your age should equal your percentage in bonds. That would mean a 30-year-old investor would have 30% of his portfolio in bonds. That could result in a significant amount of missed growth within a nearly 40-year investment time horizon. As a general rule, we recommend having only money you need within the next 10 years in fixed-income investments, while money you do not need in the next 10 years should be invested in high-quality common stocks for growth.
Investors often learn to save 10% of their pay for retirement because the amount saved each year will increase with their pay. While saving is good, this fails to take into consideration your age, what your spending needs might be in the future, and it fails to consider when you began saving and how long you have until you want to retire. At age 65, how much money do you need to get to age 90, spending $60,000 after tax, assuming 4% inflation? If it were possible to guarantee a 10% return, you would need around $784,100. However, there are no investments that can guarantee a 10% return for 25 years. The best advice is to start saving early and often. As your pay increases, start saving more. If you get a 5% raise, sweep half of it into your retirement savings, allowing yourself to take home only 2.5% of your raise. Don't make the mistake of thinking it will be easier to save for retirement in a few years. It won't.
Often, investors assume they will spend about 70% of their pre-retirement income during retirement. This is rarely the case, as many factors go into determining what you’ll spend, including your age, inflation, health and retirement goals. If you retire early, between ages 50 and 55, you will most likely spend more than your working years simply because you will have time for the leisure activities you couldn’t do prior to retirement. Retiring between ages 55 and 60, you’ll likely spend slightly more, and when retiring between ages 60 and 65, most spend close to 100% of their pre-retirement income.
A recent misconception investors have attached to are that target-date funds are a set-and-forget investment. With a target-date fund, an investor picks a fund that closely matches his target retirement date, for example 2035. The fund generally starts aggressively invested in stocks, but as 2035 approaches, the investment mix should become more conservative. However, the funds vary greatly. Some start 100% invested in stocks and gradually become conservative. Others may start at a 75/25 stock to bond mix and change to 25/75 stocks to bonds a few years before the target date. These funds assume an investor needs a certain amount of bonds based solely on their age. As explained at the beginning, your bond allocation should be determined by when you need the money for your living expenses.
Financial planning should not be a cookie-cutter formula, but should account for all the variables in your life that might influence how your money is spent. Investors can generally benefit from having an expert look at their individual circumstances, customizing the financial planning process.
William G. Lako, Jr., CFP®
Shawna L. Theriault, CFP®, C.P.A.
William G. Lako, Jr., CFP®, serves as a principal at Henssler Financial. Shawna L. Theriault, CFP®, C.P.A. is a Managing Associate at Henssler Financial, specializing in assisting high net worth individuals, families and businesses in tax, financial and estate planning. Both Lako and Theriault are CERTIFIED FINANCIAL PLANNER™ professionals. Founded in 1987 by Gene W. Henssler, Ph.D., Henssler Financial provides solutions for individual, corporate and institutional clients that incorporate a range of services, including wealth management, financial planning, tax preparation and consulting, small-business retirement planning and estate planning. www.henssler.com