There is an idea floating around in the investment world that one can take on a very high amount of risk in equities because (allegedly) stocks always go back up a few years after a crash so all a retiree needs to do is to have enough cash to go several years without selling their stocks to pay for living expenses. Thus, allegedly, a wealthy retiree with $10million can have an equity allocation of 80% or 90%, instead of only 30%. Traditional financial planning theory is that one should allocate bond ownership in proportion to one’s age. For example, a 30 year old should have 30% in bonds, 70% in stocks and a 65 year old should have 65% in
Investment theory says that one should hold bonds so as to diversify from risk-on assets and be able to buy stocks during a crash by selling bonds. Some financial planners claim that the nature of human capital (a person’s ability to earn income from working) is like a bond if they have a secure, reliable job. Thus some advisors claim that the bond-like nature of someone with highly secure job means that the investor can afford to have a higher than average allocation to stocks because of the bond-like nature of his personal “earned” income from working. However, I disagree. For this to be true the worker must be willing to cavalierly abandon long term goals of retiring
Every year someone publishes something like “Top 10 Financial Planning Strategies for the New Year”. Typically these are filled with well-intentioned standardized clichés like “max out your 401k contribution” but these top ten clichés can be inappropriate for some people. Here’s a contrarian opinion about the Top 10 Financial Planning Strategies: 1. Max out annual 401k contributions: In some cases it may be a mistake to contribute to a 401k. If the 401k makes long term capital gains then when those profits are withdrawn they are taxed as ordinary income. 2. Contribute to a 529 Plan: This could backfire because funds in a 529 plan can only be reallocated once a year so if the day after you reallocated
The five key elements of financial planning:
A One-Year Checklist to Retirement
If Rates Are Heading Up, Should You Refinance Now?