Professor Moshe Milevsky, a researcher, author, and speaker on personal financial planning, talks about not just asset allocation, but product allocation for retirement. Product allocation is the next step in the evolution of asset allocation, designed specifically for people close to or in retirement. Rather than allocating a pool of money among asset classes, you also incorporate guaranteed income products.
According to Milevsky, product allocation can be accomplished with three product silos:
- Traditional Investments: These could include separately managed accounts, exchange-traded funds (ETFs), mutual funds, and other conventional accumulation-based instruments. Throughout retirement, one would systematically withdraw these assets, attempting to make them last as long as possible and then use asset allocation to achieve a desired return with an acceptable degree of risk.
- Pensions and Immediate Annuities: These could include defined benefit plans and fixed income annuity products (or payout annuities). In exchange for fixed income payments, you give up liquidity, investment control, and in some cases, the ability to leave any of these assets to heirs.
- Guaranteed Income Products: May offer income for life, exposure to stock market gains and losses, and control. They are also designed to leave remaining assets as an inheritance and can provide protection against sequence-of-returns risk.
How much money you should allocate to each category depends on your expected retirement age, gender, health status, desired spending rate, and inflation assumptions. For more resources to help you understand your asset allocation options, visit www.familywealthadvisory.com.
Asset Allocation seeks to maximize the performance of your investment portfolio using diversification. Although using an asset allocation methodology does not guarantee greater returns or more consistent returns, it may be able to reduce the volatility of your portfolio.
