How to watch your money grow

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 Q. How do I decide the best asset allocation for me? I’m 43 and I hope to retire no later than 65, and I have about $200,000 in investments. Most are in a 401(k). I don’t really pay attention to the stock market so I don’t have to panic when things aren’t going so well, and I know I need to take some risk to see my money grow.

A. It’s great that you’re thinking about how your savings now will impact retirement in the future. Best to ask now — while you can make changes — rather than wait until it’s too late.

It sounds like you are willing to put your money to work in the stock market, which when combined in a diversified portfolio over a 22-year timeline combined with continued saving, gives you a good chance for success, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

It’s difficult to know what you need for retirement without knowing more about your expenses and your lifestyle today, she said. But, D’Agostini can give some projections for your savings.

“For example, $200,000 growing at just 6 percent for 22 years would give you $720,707,” she said. “If it grows for the same time at 8 percent, you would have $1,087,308.”

That shows you the potential value of money growing in a tax-deferred account over a long time horizon.

So given your more aggressive attitude towards investing, and the fact that this money cannot be accessed until age 59 ½ at the earliest, D’Agostini recommends you invest at least 80 to 90 percent in stocks with the balance in fixed income.

“The stocks should be primarily in the large-cap space, with some in the mid/small cap space and the rest in international stocks for greater diversification,” she said.

Unfortunately, when it comes to asset allocation, there is not a one-size-fits-all approach.

“Through the use of shortcuts and rules of thumb, many have tried to simplify the asset allocation decision, but those shortcuts — subtracting your age from 100 to determine the percentage of assets you should invest in stocks — fall short of giving you a balance of stocks and bonds for your unique situation,” said John Zeltmass, a certified financial planner with RegentAtlantic Capital in Morristown. “Because, after all, investors are like snowflakes – each one of us is unique in our own special way!”

Zeltmann said your question provides two valuable pieces of data: your estimated retirement date, which provides a sense of the time horizon over which the dollars will be invested, and your comment that “you don’t really pay attention to the stock market” and therefore “don’t have to panic when things aren’t going well,” which gives some insight into your risk tolerance.

“Those two points on their own bring us a long way towards answering your question. In fact, using solely this information, I might suggest you maintain an asset allocation of approximately 80 percent stocks, 20 percent bonds,” he said.

On the equity side of the ledger, he recommends you be as diversified as possible, including allocations to global large-cap stocks, U.S. and foreign small-cap stocks, as well as emerging market stocks.

He also suggests allocations to other diversifying asset classes, such as infrastructure master limited partnerships, frontier markets, real estate investment trusts (REITs), commodities and hedging strategies.

On the fixed income side, with rising interest rates on the horizon, he recommends you focus on shorter-term, high-quality debt.

“I’d also recommend you use opportunistic bond fund strategies, which look to generate return not from movements in interest rates but rather driven by credit risk and currency risk,” he said. “Lastly, even though inflation isn’t regarded as a significant threat today, it will likely pick up in some fashion down the road, so it’s important to introduce some inflation indexed bonds into the portfolio.”

In light of his suggestions, Zeltmann said it should be noted that very few 401(k) retirement plans offer exposure to all of the asset classes listed, so you should do the best you can with the investment options you have in your 401(k). Then, as your non-401(k) savings grows, consider periodically revisiting your allocation with a financial planner.

Of course, it’s not really as simple as taking the two data points you provided in your question and arriving at an asset allocation of 80 percent stocks and 20 percent fixed income, he said.

When determining an individual’s asset allocation, Zeltmann said he also wants to incorporate additional information such as are you married, and if so, how many children do you have? Do you intend to pay for college for your children? What sort of lifestyle do you plan to maintain in retirement? Do you have any pension income available in addition to Social Security? Do you have life insurance in place and, if so, how long is the coverage in force? What is the current structure of your estate plan, if there is one?

“Answers to each one of these questions will impact one’s ability to take additional risk in his or her portfolio,” Zeltmann said.

And remember: when determining the appropriate allocation for your investments, time horizon and risk tolerance are important variables to fold into the discussion. However, additional factors like those listed above should be considered as they can have a significant impact on your asset allocation decision, which is why it may make sense to work with a professional when navigating this potentially rocky path, Zeltmann said.

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This story was first posted in May 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.