Life happens. One day, you’re a carefree 24-year-old touring craft breweries and rocking at live concerts. And before you know it, you’re sniffling and waving goodbye as your firstborn heads off to college. You’ve learned to adjust to the vicissitudes of life, but have you tweaked your retirement portfolio along the way?
If you haven’t, you could be endangering your financial future. As your life circumstances change, so could the risk characteristics of your retirement portfolio.
Changes: Expected and Unexpected
A retirement portfolio typically relies on risk tolerance and asset allocation. While planning for the rest of your financial life, pay attention. “Be aware of anything that is going to change your risk tolerance,” says Ryan Campbell, content manager for Investools. Many investors view this as a high priority.
What kinds of things can alter your life landscape? Here are a few:
- Going back to school
- Buying a home
- Getting married
- Having children
- Raising children
Yes, children made the list twice. There are the costs of having a child—the medical and lifestyle costs associated with pregnancy, birth, and such. But there are also the ongoing expenses—food and clothing, education costs, sports activities and their gear, medical care, orthodontia (do you have any idea how much braces cost?). A recent USDA study puts the total cost to raise a child at about $14,000 a year.
Then as the years go on, there could be:
- A divorce
- The death of a spouse
- A job loss
- A catastrophic financial setback
- Medical issues
The possibilities aren’t exactly endless, but you get the point: There might be a dozen life-altering events that could prompt you to reassess where you’re going financially.
Reviewing and (Possibly) Rejiggering the Portfolio Mix
For years, some financial consultants recommended subtracting your age from 100, and the result would be your percentage allocation to stocks. So at age 30, your portfolio might be 70% stocks and 30% bonds and cash; at age 60, it might be 40% in stocks and the rest in bonds and cash investments, and so on. But that guidance has been challenged in recent years, partly due to the growing number of centenarians in the U.S.
Another long-held suggestion is to keep your bond allocations close to your age. So if you’re 65, your portfolio might be 65% bonds and cash equivalents, against the more aggressive stock piece. It’s important to note, though, that any rule of thumb is simply a starting point; investors should tailor the mix to their personal objectives and risk tolerance.
“The longer-term perspective is key,” says Campbell, who adds that it’s also important to determine the financial personality of your spouse or significant other, as well as their work history. “If there’s only one breadwinner, the stay-at-home parent is going to be behind in savings for 401(k)s and the like,” he says. “That’s a life-changing event that could prompt some investors to reassess their goals.”
Campbell also suggests being mindful of two big variables that can work against your retirement nest egg: taxes and inflation. Tax-deferred accounts such as IRAs and 401(k)s are allowed to grow federal tax-free, but once you start taking distributions, those withdrawn funds are taxed at prevailing rates. None of us knows for sure what those rates will be in the future. And inflation, although muted in recent decades, could crop up at any time and erode the real value of your retirement dollars.
And how do you decide upon that portfolio mix, and when and how to tweak it along life’s journey? Speaking with a financial professional can certainly help, but Campbell also suggests arming yourself with education such as that provided by Investools. “Our Portfolio Management course can help investors examine their life circumstance and evaluate their risk tolerance,” he says.
Investools, Inc. and TD Ameritrade, Inc., are separate but affiliated companies that are not responsible for each other’s services or policies.
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