Financial Fellow

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How I Allocate My Retirement Money

May 2nd, 2009 · 11 Comments

Written by J.P. Wicklein

     Recently I received a couple questions from readers about how I invest my retirement funds.  I thought it would be useful to share my answer with everyone.  Don’t view my approach as advice on how to invest your retirement money.  When investing you need to weigh factors such as your age and level of risk tolerance.  As such, what’s best for me, may not work for you.  Hopefully, though, reading about my approach will help you consider some things when determining how to allocate your retirement dollars.  Here’s how my retirement asset allocation shakes out:

Stocks vs. Bonds

     As you can see from the pie chart, I’m heavily weighted toward stocks.  As a 31 year-old I should definitely have the majority of my retirement portfolio in stocks.  That said 97% may be a little high.  Given the fact that the stock market is way down, though, I’m reluctant to unload any stocks at this time.  If I did sell them, I’d be selling low and may miss out on the stock market recovery.  Once the market sufficiently recovers I will probably rebalance a little closer to 90/10.   

Pre-Tax vs. Post-Tax

     My retirement portfolio consists of a traditional (pre-tax) 401k, a Roth IRA, and a Roth 401k.  As the pie chart reveals, the bulk of my portfolio is in pre-tax dollars.  I haven’t decided what the appropriate ratio of pre to post-tax is but, I think it’s important to have some of both.  Doing so will give me greater control over my taxes when I retire.  For example, if I planned on spending a lot of money one year I’d use more after tax (Roth) dollars to avoid higher tax brackets.  On the other hand, if I only planned on spending a small amount of my retirement dollars I’d rely more on pre-tax (traditional 401k) funds. 

Index Funds vs. Mutual Funds

     I’m a firm believer in low cost index funds.  I’ve read a great number of books and articles stating the same fact:  Over the long term, low cost index funds outperform the great majority of actively managed mutual funds. 

     That said the majority of all retirement funds are still invested in actively managed mutual funds.  Also, a good number of folks value actively managed mutual funds over index funds.  (Admittedly, though, many of these people either sell, or manage, mutual funds.)  Nonetheless, I’m not one to put all my eggs in a single basket.  So, although I favor index funds, I still have about a quarter of my retirement portfolio in actively managed mutual funds.

Domestic vs. International

     I suspect a number of conservative investment advisors would look at the percentage of my portfolio that’s invested internationally and suggest I reduce my exposure a bit.  For now, though, I’m pretty comfortable with it around 25%.  I’m of the opinion that the best growth over the next several decades will be internationally.  That said I’m a little leery of some foreign accounting standards.  Also, investing in emerging markets with less stable governments poses additional risk.  As such, I’m inclined to keep the bulk of my portfolio invested in U.S. based companies for the time being.  (As an aside I believe a good way to gain some international exposure, while leveraging the stability of the U.S., is by investing in U.S. based companies that do a lot of their business internationally.  Companies like Coca-Cola or Microsoft fit this description.)

In conclusion

     By no means is my retirement asset allocation strategy perfect.  That said it works for me.  What do you think?  How would you suggest changing my retirement allocation?  How do you allocate your retirement money?  Add your comments below!

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Photo by:  Jeff Belmonte

Tags: 401k · IRAs · Investments · Retirement · Stock Market

11 responses so far ↓

  • 1 ctreit // May 3, 2009 at 12:14 pm

    Very nice, short, and comprehensive post. It should give your readers good ideas what options there. I personally also like index funds when I invest in financial instruments like stocks and bonds.

  • 2 Brian // May 4, 2009 at 9:46 am

    Right now would be an excellent time to invest in real estate. Buy low, sell high…I hope.

  • 3 Adam K. // May 4, 2009 at 9:57 pm

    Brian,
    Really depends on what you mean by invest.

    Houses were artificially inflated to unsustainable values. Homes have now come back to proper valuation (and may still have a way to go). A huge supply of homes and a small demand for them means prices will not be going up for the forseeable future.

    If you’re determined to “invest” in real estate, i’d suggest some ETF’s like IYR or XHB which had a great day today (and a great month on strong housing data). This way, you can get out a lot easier when things go sour. A lot easier to dump a fund than a house…

    (I don’t own either fund)

  • 4 Financial Fellow // May 4, 2009 at 10:06 pm

    Thanks, ctreit. I appreciate the feedback!

  • 5 Financial Fellow // May 4, 2009 at 10:09 pm

    Adam K. -

    Good suggestion on the real estate ETF’s. Would those be REIT’s?

    I’m thinking Brian was suggesting buying a home, renting it out for a bit (maybe fixing it up some), and then selling it once the market recovers. Although I suppose that could be a decade or more…

    John (Financial Fellow)

  • 6 Brian // May 5, 2009 at 7:55 am

    Yes, John, I did mean that. I actually meant a multi-unit dwelling of some kind. There are lots of those in foreclosure too, and they’re cheap if they need a little work.

    I wouldn’t touch a single family right now…unless I were in the market for a house for myself. Surprisingly though, people are still successfully rehabbing and re-selling in Saint Louis. It’s not 2004 by any stretch, but it isn’t a completely dead business either.

  • 7 Adam K. // May 5, 2009 at 10:01 am

    Indirectly. They pretty much seek results that correspond to the real estate sector of the equity market, including REITs but also can simply track and index.

  • 8 Financial Fellow // May 7, 2009 at 10:25 pm

    Gotcha. Thanks for the clarification, Adam.

  • 9 Financial Fellow // May 7, 2009 at 10:26 pm

    Brian -

    Interesting to hear that folks are still successfully flipping places in STL. I’ve always felt like you make your money when you buy the house/building - not when you sell it.

  • 10 David // Jul 1, 2009 at 4:36 pm

    Folks, here’s my question. I have about $200 k that I have saved up and want to invest in index funds. I am thinking an allocation of 50% total market, 30% developing market, and 20% a REIT index. Does anyone have any thoughts on that allocation? I want long term (dont need the money for another 20 years) growth, and- at 34- can be on the risky side. Thanks!

  • 11 Financial Fellow // Jul 2, 2009 at 7:09 am

    David -

    Thanks for the great question! Here are my thoughts:

    1) Way to go on having $200K by the age of 34.
    2) Overall I think it would be tough to argue with your allocation. It’s pretty well diversified. Here are some tweaks you may want to consider:
    - When picking your Index Funds be sure to take a good look at the expense ratio. Vanguard offers some of the more popular low cost index funds.
    - You may want to consider some value index funds in addition to growth.
    - I’d also take a look at a small or mid cap index fund.
    - As you get older you may want to consider shifting more of your funds to a bond index fund.

    Overall, though, I’m splitting hairs a bit. I think you’d be pretty well diversified with the above approach. I’m wavering a bit on the 20% REIT investment. Personally I’d probably be more comfortable with 10% REIT index.

    Let me know what you decide!

    John (Financial Fellow)

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