Question: Kyle and Catherine in Cincinnati: We both want to retire in about 10 years. Is there a recommended amount of stocks/bonds we should have?
A: Some online retirement calculators and investing “rules” would say this is an easy question to answer. For instance, the “Rule of 100” (sometimes also called the “Rule of 110”) says subtracting your age from 100 (or 110) gives you the percentage of stocks you should have in your investment mix.
But here’s the problem: A rule like this treats everyone who is the same age as, well, completely the same! It doesn’t take into account considerations such as your sources of income, your tolerance for stock market risk, other sources of income, or your retirement goals. Your financial situation and retirement dreams are unique to you, so why use a rule that gives “blanket” advice?
Moreover, this generalized type of advice usually suggests a heavy emphasis on bonds for someone nearing retirement. But just getting to retirement isn’t enough. You also want to get through retirement, right? For you, it might make sense to have a little more stock exposure to help beat taxes and inflation. But again, everyone is different.
Here’s The Allworth Advice: To know how much stock exposure you should have, a personalized financial plan from a fiduciary financial advisor can help. It will analyze your entire financial picture and determine an investment mix of stocks and bonds that’s customized for your needs. This way, you’ll be taking just the right amount of investment risk – no more, no less.
Question: Charlotte in Blue Ash: I have a pension and am wondering if it’s better to take the lump sum or annuity payment.
A: This decision comes down to a number of factors, including your age, other assets and investments, your health and life expectancy, tax bracket, marital status, type of pension plan, solvency of your company, and current interest rate environment, just to name a few. But let’s take a look at the pros and cons of both options to at least give you a starting point.
First up, the lump sum. The main benefit is flexibility. You can invest the money as you see fit, take distributions when you want, and, assuming the money is invested properly, there’s an opportunity for it to be passed on to beneficiaries and heirs. However, if you go this route, you need to perform the ‘mirror test:’ Essentially, would you be able to trust yourself with a large chunk of money? According to AARP, one in five people who take the lump sum option spend it all within six years.
As for the annuity option, this removes that potential risk of temptation since your money is being spread out over incremental payments. However, while some annuity options come with an annual cost of living adjustment to help keep pace with inflation – and some even offer survivor payouts to spouses – not all do. Plus, there’s less financial flexibility. But for some, the guarantee of a pension for life outweighs any of these negatives.
It will help to ‘run the numbers.’ Look at the monthly payment amount offered with the annuity option, then figure out what you could generate yourself by investing the lump sum at about the same risk level. And keep in mind that as interest rates rise, lump sum pension values decrease.
The Allworth Advice is that this decision is different for everyone. But no matter who you are, it starts with understanding your pension plan. Check with your plan administrator about its details and payout options. If you find you need additional guidance, a fiduciary financial advisor can help.
Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to email@example.com.
Responses are for informational purposes only, and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC-registered investment advisor adviser. Securities offered through AW Securities, a registered broker/dealer, member FINRA/SIPC. Call 513-469-7500 or visit allworthfinancial.com.
This article originally appeared on Cincinnati Enquirer: How much stocks and bonds should we have?