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A Financial Flop?

In 2009 TIME magazine ran an article titled “Why It’s Time to Retire the 401(k).” 

In the middle of a nasty bear market in stocks, its author wrote, “The ugly truth, though, is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves.”

The TIME article revealed the challenge of planning for retirement while dealing with portfolios that had plummeted 31% on average from 2007 through 2009, according to Fidelity. 

It got me thinking; “If a 60-year-old is hoping to retire in 5 years and experiences a 30% portfolio decline, is that an inherent problem in 401(k)s, or is that an asset allocation problem with the investor?

If a steep market decline forces someone to work longer and spend less in retirement, it might just be an asset allocation problem due to poor planning by the investor.

It is time to talk about another power setting in your financial plan – your asset allocation between stocks and bonds. There are countless ways to arrive at an asset allocation that is best for you – everything from risk assessment questionnaires to Monte Carlo simulations can get the job done.

Let’s keep it simple. Why not consider keeping your next 6-8 years of living expenses in bonds, CDs, and/or cash? In other words, create an allocation between stocks and bonds with the goal of never selling your stock holdings in a bear market to cover your expenses.

This is especially important during the early years of retirement, a concept known as sequence of returns risk, explained here.  

Creating a common-sense financial plan offers clarity on your future spending, how that weighs on your asset allocation, and how this decision reduces sequence of returns risk.

Speaking of future spending, next week I will discuss my favorite power setting of all. Stay tuned.

Retire With Peace of Mind

If you have questions about your sequence of return risk or asset allocations, let's connect on a complimentary strategy call and discuss your financial plan. Let's dial in your power settings for a successful retirement.