Check out my introductory post on investment time horizons.
Investment goals such as retirements are long (hopefully) term events. If you are 55 years old and are planning to retire in 5 years then you should have a portion of your investment portfolio set aside which will have a short term horizon and therefore will be invested in safe investments such as certificates of deposit, money market mutual funds and high interest savings accounts. The remainder of the portfolio will not be needed for several years after you start the retirement (and beyond) and therefore can potentially be invested in riskier investments. The farther an investor gets into retirement then the more their investment time horizon will shorten and they should lower the risk of their portfolio.
One common rule of thumb is that retirees should subtract their age from 100 to get their percentage of fixed income. Ie someone who is 70 might want 70% bonds and 30% stocks.
How much do you have?
I would suggest that a retiree should look at their personal situation to determine what kind of asset allocation to have. A rich retiree that has a lot more money than they need can probably afford to take on more risk and have a higher equity allocation. A retiree that doesn’t have a lot of money and only has enough to get by can’t afford any losses and needs to be more conservative – an annuity might be a good idea for at least part of their portfolio.
What about estate planning?
What if someone is 94 years old, required $35,000 per year for living has $4 million in the bank and wants to leave the bulk of their estate to their family. In that case you might argue that they should invest a small portion of the portfolio in safe investments and the rest can be a higher risk portfolio because the time horizon for most of the portfolio is that of the relatives who inherit the money which would normally be a lot longer than that of the original investor.
Photo Credit:Eman Naura