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How to Determine Your Optimal Retirement Investment Asset Allocation Thumbnail

How to Determine Your Optimal Retirement Investment Asset Allocation

Asset allocation is one of the most important concepts for investors to grasp. 

That’s why one of the most-asked investment questions is, “How can we achieve optimal asset allocation, particularly during retirement?”

Today, we’ll cover and answer some of your concerns about asset allocation for retirees. Plus, we’ll provide advice on your investments and guide you through some of the ways Heller Wealth Management can help you create a portfolio that is entirely tailored to your specific needs!

Read on to find out how we do it! 

What Is an Optimal Asset Allocation Portfolio? 

An optimal asset allocation portfolio differs from person to person. It is entirely dependent on the individual, their situation, and their future financial goals and aspirations.

To put it simply, it is an investment strategy that seeks to balance risk and reward by allocating a portfolio's assets in accordance to your particular financial objectives.

That is why it is vital to develop a portfolio that works for you — and for you to go through the process of determining what the right allocation is. 

Avoiding Asset Allocation Rules

At Heller Wealth Management, we work with a lot of clients who come to us before they retire so that we can help them transition into retirement. With these clients, we have a lot of conversations about determining the right asset allocation for someone who is retiring. But what we noticed is that there is one rule that everyone seems to want to follow: Subtracting your current age by 100 (or, more recently, 110 or 120) to determine how much should be invested in stocks. 

But we’re here to tell you it’s time to throw all those rules out the window! 

Why? Because there are many factors to consider when creating your ideal portfolio including your risk tolerance, time horizon, and tax ramifications. 

Understanding Income vs Withdrawals

Withdrawals are not the same as your income. Withdrawals are the money you need to live on. 

In other words, if you require $10,000 per month to live on, and your Social Security and pension is $5,000 a month, that means you need to withdraw $5,000 a month from your portfolio. It does not mean you need an income of $5,000, but you need to cash out $5,000 a month. 

During the last few years, interest rates on really safe portfolios have nearly reached zero, making it impossible for individuals to survive only on income. When this occurs, you will need to have a total return strategy. What we mean by this is that you will need to have items, such as the stock market, that will grow more for you over longer periods of time to ensure your withdrawal amount is enough. 

For example, if your withdrawal rate is 5% and you were drawing somewhere between 4% and 5%, but you're only making 1% of that on your safe portfolio, where are you going to obtain the returns to get up to 4% to 5%? 

Historically, the only method to do so has been through the stock market. 

However, there are alternative ways to build a portfolio to optimize your total return because you may not have enough assets to live on 1% for the rest of your life.

The Heller Wealth Management Reservoir Strategy 

Above, we discussed how our total return strategy works with the withdrawal process, but how can we create a total return strategy with the right asset allocation while simultaneously ensuring that we don't panic and sell the wrong thing at the wrong time?

The answer: The Heller Wealth Management Reservoir Strategy. This is a strategy we developed after recognizing that emotions have a big impact on our investments and what happens psychologically when markets decline.

The Heller Wealth Management Reservoir Strategy is similar to the bucket strategy and has been proven to work. It has three different strategies and two different reservoirs that flow into your income pocket. So in other words, we have short-term investments (1-3 years), medium-term investments (3-10 years) and long-term investments asset pools (more than 10 years). 

But before we can implement these strategies, we need to figure out how much you need each month, so if you need $5,000 a month, we will look at the short-term reservoir of somewhere between two and three years. 

And why do we select that? 

The purpose for this is that if there is a stock market correction, we have looked at the history based on your asset allocation and how long you will require before withdrawing from the stock market. 

Furthermore, during a downturn, we will sell out of the reservoir, and when the market recovers, the long-term reservoir will replenish the short-term reservoir and the similar idea does for the medium-term reservoir. 

For a better and visual  explanation, we have a case study on our website, which will help you understand the Heller Wealth Management Reservoir Strategy with a real life client perspective. 

To learn more about determining the optimal asset allocation for and as a retiree  listen to the Retire Right Podcast or contact us via our contact page.