There are many rules of thumb in the world of personal financial planning, particularly when it comes to retirement planning. Some common “rules” are to be more conservative with your money as you get older, or that the percentage of bonds in your portfolio should be equal to your age. These rules may be appropriate for some, but not for all. Many affluent individuals often have more flexibility as investors. Instead of focusing on age, let’s look at other more important factors to determine the best portfolio mix that accomplishes your retirement goals.

Age is just a number

The simple fact is this: Age should not dictate your portfolio mix.

It is simply a single data point with no real impact on your financial health. Other than telling you how close you are to life expectancy, age is just one consideration to the design, function, and purpose of most financial products. Likewise, it doesn’t say anything about your unique goals, opportunities, and current financial flexibility, all of which should be considered when developing your portfolio mix.

Consider this: If an 80-year-old retiree with a $3 million portfolio earns $300,000 annually from investments and business interests but has only $100,000 in annual cashflow needs, they don’t necessarily need to tie up 80% of their wealth in bonds. They may if they wish. But that person clearly has significant flexibility to invest aggressively, if they so choose. Their goals should be the driver of financial decisions, not their age.

Ultimately, deciding how to balance portfolio mix should be based on two primary factors:

• Your anticipated cashflow needs, and the timing of those needs
• Your personal psychological risk tolerance

It can take work to achieve a complete and thorough understanding of these two factors. But doing so can help avoid liquidity problems and give you confidence that your retirement plans accurately reflect your goals and the financial flexibility your current situation allows.

Determining cash needs and risk tolerance

Cashflow needs are relatively simple to determine with sound personal accounting and record-keeping practices. A team of financial advisors can work with you to identify all current expenses and create projections for future cashflow needs so you can plan appropriately. During this process, it may help to consider all the factors that can put your money in motion and discuss any financial goals you may have that extend beyond your lifetime.

To determine your personal risk tolerance, it often helps to walk through different scenarios to get a better understanding of how you might respond to various financial impacts. For example:

• If you have $1 million in your portfolio and take a 25% hit so you now only have $750,000 in assets, how would you react?
• If you found out you should anticipate significant healthcare costs near end of life, would you prioritize allocations and disbursements differently?
• If you have three more grandchildren, do you have the flexibility to support both your family’s current financial needs and meet college savings goals for your grandchildren?

Simply talking through these kinds of scenarios with an experienced financial advisor can help illuminate your true motivations. It will also help you put a plan in place so that you don’t have to make quick or emotional decisions as your circumstances change in the future.

There is a more technical way to approach the challenge of assessing your own personal risk tolerance. Using a Monte Carlo simulation, you can visualize the range of possible experience for your portfolio on a standard distribution curve. A wide curve means greater variability in expected returns, while a steep curve means most expected returns fall close to the mean. When using this type of analysis, some things to consider are:

• If you have a significantly steep or shallow bell curve, what does that mean for you emotionally?
• When you see where your returns might fall, how do you feel?
• Do you feel confident your current retirement plan can accomplish your most important goals?

Visualizing expected returns can be a useful way to assess your potential portfolio performance. But an equally important thing is to look inward and determine whether that performance is in alignment with your goals and emotional tolerance for risk.

Aligning finances and emotions

Your age may be particularly important to you on a personal or emotional level. But when it comes to retirement planning, it should not be the single dominant factor. By undergoing a process of self-exploration while taking an objective look at expected investment returns and projected cashflow needs, you can build a retirement strategy that is tailor made for your unique situation and aligns with your financial goals.

For assistance building and managing a portfolio that reflects your true needs, goals, and personal risk tolerance, contact us today. We’ll schedule a call to discuss your current strategies and how we can move you closer to achieving your financial goals.