Friday, November 12, 2010
Let's look at the retirement account for Mr. and Mrs. Sharma. Mr. & Mrs. Sharma is a retired couple entering their early 70s and their portfolio is divided among the three major asset classes.
The value of their retirement portfolio peaked at Rs. 50,00,000 when they were in their 60s.
Since retiring, Mr. & Mrs. Sharma have withdrawn some of the capital in their retirement account to live on. As a result, the current value of their retirement portfolio is Rs. 45,00,000.
When Mr. & Mrs. Sharma rebalanced last, they added 10% to bonds (to 20% of portfolio value) and reduced their allocation to stocks by 10% (to 70% of portfolio value). As they enter their 70s, they decide to allocate an additional 10% to both cash and bonds.
As a result, they cut their allocation to stocks to 50% from 70%.
It's also noteworthy that even as they enter their 70s, they keep as much as half of their portfolio invested in stocks. This is because stocks are the only major asset class that outperforms inflation.
Most financial advisers recommend allocations of at least 50% to stocks, even late in life, in order to keep your portfolio growing at a rate at least as fast as the rate at which you are drawing it down to live on.
When rebalancing in favour of bonds, a laddering strategy may help you reduce interest rate risk. With laddering, you invest in fixed-term deposits or bonds of serial maturities.
Reinvest in Bonds: If interest rates are expected to remain low or fall even further, bond prices rise. As a result, you may wish to invest the matured amount in bonds.
Invest in Cash: If interest rates are expected to remain high or increase, bond prices fall. You may wish to invest the matured sum in an interest-bearing deposit such as a money market fund.
Spending Money: A third option is to spend the money. After all, your retirement fund is to provide you with a means of a living!
Rebalancing Your Portfolio During Retirement