Addressing Asset Allocation in Respect to Your Cash Flow

In this week’s case study, the “Money Talks” hosts take a look at a business owner who is seven to 10 years from retirement. While he has saved throughout his career, he has followed a common guideline that the equivalent percentage to your age should be in fixed-income investments. Therefore, at 54, nearly 55% of his assets are in fixed income.

This is a common rule of thumb that is used for those who have never worked with a financial planner or have had a cash flow projection run to plan their spending. We find this to be a “catch all” theory that does not take into consideration the type or amount of assets an investor owns, the investor’s time horizon or his cash flow situation. We believe that there is no standard rule that is right for everyone. No two asset allocations are alike.

We approach asset allocation with our Ten Year Rule that states any money you may need for liquidity spending in the next 10 years should be in fixed-income investments with the intent of holding them to maturity. Assets not needed within the next 10 years should be invested in growth investments. We base this theory on the fact the long-term average growth for the stock market is around 10.5%. At 54, this investor has likely had more than half his assets out of the stock market, missing considerable growth, as the markets were up near 32% in 2013.

We begin asset allocation by asking the hard question, “what do you spend?” Our intent is to manage the gap between the income you should have coming from Social Security, pensions, interest, and dividends and your actual after-tax spending in retirement. Very rarely do retirees spend less once they leave the workforce. Free time brings the desire to travel, take up hobbies, or spend more on the grandchildren.

Once we understand what you are spending, we look at what your maximum spending would be, figuring a 4% inflation rate, and planning for your assets to run out when the youngest spouse reaches age 92. The difference between your maximum spending and your actual spending is quite telling. If your maximum spending is only $5,000 more than your actual spending per year, you have very little room for change or emergencies. We recommend investors spend less than 85% of their maximum spending.

After we have figured these numbers, we can then customize an asset allocation that is tailored to your situation. If you have a tight gap of $5,000, we may recommend considering long-term care insurance to protect your assets in the event you need care. With a larger buffer between actual and maximum spending, an investor may be able to self-insure. If you have a negative gap, we may recommend working longer and cutting current spending to save more. By planning more than 10 years in advance, ideally, you have the time to make changes to your spending habits that can affect your future.

If you have questions regarding your asset allocation, our experts are here to help.

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.

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