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Colleen's Corner

Asset Allocation

Often financial "experts" make asset allocation difficult to understand. My goal in this series of articles is for you to understand asset allocation thoroughly, in an easy to understand format.
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How to use the Retirement Calculator 3.0

There are 6 inputs for Initial Savings, Expected Inflation, Annual Withdrawal, Stocks, Bonds and Management Fees. The Cash field will populate a number based on your mix between stocks and bonds. Once you do this you can click on the calculate button underneath Stocks, Bonds and Cash to get your Results. The Results are at the top of the Calculator.

Retirement Cacluator has developed this simple planning tool to analyze the impact of withdrawing money from your savings during adverse market conditions and allows you to optimize your asset allocation between stocks, bonds and cash, providing a safe and worry free source of income.The last 50 years of stock market and bond yields have been analyzed. The Retirement Calculator assumes that you are unfortunate enough to begin withdrawing money at the beginning of the worst economic downturn, which was the 1973 - 1974 time period and includes the most recent downturn 2000-2002. You can click on the Definitions button at the very top of the calculator to get definitions for the calculator.

The Retirement Calculator allows you to adjust your asset allocation to optimize your withdrawal rate and produce the highest final savings during a 30 year period. When using the calculator, you can input values for initial investment, % management fee, % expected inflation, bonds, stocks and annual withdrawal amount. The Retirement Calculator then charts a 30 year projection of your investments performance. Retirement Calculator has included a new feature for how managment fee's impact how long your money will last. It also calculates the actual rate of return and compares it to the hypothetical return you would achieve using a single long term historical average. As can be seen in most cases actual return rates are significantly lower. This is because you began withdrawing savings during a falling market. Historical returns for stocks were based on a stock portfolio of 70% U.S. large caps, 15% international and 15% small caps. Bond yields were based on 30 year U.S. Government bond yields. Standard indexes of the S & P 500, Russell 2000 and MSCI EAFE for international stocks were utilized. Other measures of historical performance would be impacted similarly.

The most important input by far required for any retirement calculator is the interest rate you can expect to receive on your investments. All other calculators either use long-term historical rates of return for stocks, bonds and cash; or use an overly conservative interest rate. Even worse yet some leave it up to you to determine your own interest rate. All these can lead to erroneous results.