Asset Allocation For Retirement
Sound Advice from Trusted Experts
Vanguard – We believe that Vanguard is an excellent institution which has investors’ interests as their primary focus (they are a non-profit after all). We will use their Target Retirement funds as a basis for their recommendations.
T Rowe Price – T Rowe Price isn’t our favorite mutual fund company but they have done some credible research on the risks of running out of cash in retirement based on different allocation strategies.
Burt Malkiel – Malkiel is the author of “A Random Walk Down Wall Street” and works as a professor of Economics at Princeton.
Charles Ellis – Ellis is the author of “Winning the Loser’s Game” and is a long-time consultant to the investing industry.
Seeking Alpha – Seekingalpha.com has a section on the benefits of passive, index fund-based investing. They present a cogent and compelling case for this strategy. Their asset allocation adjustments are recommended by their founder David Jackson.
Issues to Consider
Inflation – Inflation is basically a force that will shrink the purchasing power of a portfolio. It is a primary concern for fixed income investments where rates of return are lower.
Volatility – Volatility is a measure of the stability of a portfolio’s growth over time. This is most serious in equity instruments where rates of return are more volatile.
Sigma Investing Recommends
The investor saves $7,400 in the first year and his savings contributions grow by 5% each year. These figures were not chosen randomly. They represent the amount of savings required to hit a target retirement portfolio balance of $1,250,000 in real dollars at age 65 if the investor earns consistent annual returns of 9.3% in equities and 5% in fixed income using our core strategy. We targeted this target retirement portfolio balance since it allows a 4% withdrawal to be equal to $50,000.
We study two different rates of withdrawals in retirement. At age 65, the investor withdrawals either $50,000 or $62,500 in real dollars and this amount increase each year by the rate of inflation.
The annual rate of inflation is 3%.
The investor adjusts his proportion of equity and fixed income every five years.
The investor rebalances every year.
The investor has no other income (pension, social security, real estate, etc.).
One final note: While it is crucial to stick to the right investment strategy for your retirement portfolio, it is just as important to have the discipline to save increasing more money during your full working career. We think that an investor should be saving 10-15% of their current earnings each year. With the right investment strategy it’s possible to retire and be very sure that your funds will last throughout your retirement. However, without the right disciplined approach to saving, you have no chance!