Step 73: Lifestyle Investing Option

Step 73 of the 100 steps mission to financial independence: Lifestyle investing option
Step 73: Lifestyle investing option

In the previous step we’ve looked at asset allocation and using the yearly rebalancing technique to keep the right balance between your various assets in your portfolio, even if some of your assets grew more than others, thereby taking up a bigger percentage of your portfolio. In step 73 we’ll look at how rebalancing your portfolio can also help to readjust your portfolio when you get closer to your goals. In the examples below I mainly use retirement as a goal, but it can of course be other goals too that you might have in mind for your investments, such as a college fund for a (grand)child, a down-payment for a house etc.

Lifestyle option

Let’s assume that you have a 70/30 shares / bonds allocation to start off with in your portfolio and that the main goal for that portfolio is to use it as (an addition to) your pension provision. With time when you start nearing retirement, you might become a little nervous about the possible volatility of this portfolio however. What happens if there is a sudden crash in the market and you lose a big chunk of the money in your portfolio right before or after you were planning to retire? It means you suddenly wouldn’t have the same amount of money available that you maybe planned to have, which would probably compromise some of your pension plans. Of course when you’re 30 or 40, having a portfolio with a bigger risk factor doesn’t matter as much as your portfolio still has time to recover after a possible crash before your retire. But when you’re close to retirement age, you don’t have the same luxury of time and you probably don’t want that same volatility anymore as when you were younger. Continue reading

Step 45: Calculate your Desired Pension

Step 45: Calculate your desired pension
Step 45: Calculate your desired pension

Although it is nearly impossible to predict how your pension will develop over time and how much pension schemes will change, especially if you are still many years, if not decades, away from your retirement, calculating your pension regularly and setting pension goals is a key habit to develop and establish if you don’t want to be taken by surprise when you finally get to retirement age and start needing to rely on your pension.

It’s easy to think that our pensions will work their way out for us and that we will be able to retire comfortably after 40 or 45 or even 50 years of working. Yet with fewer and fewer young people carrying the burden of paying for an ever-increasing aging population, not just in numbers but also in years living after retirement as saw in step 42, we don’t know exactly how the pensions will develop. Already many countries are increasing retirement age and this might happen again in a decade a two.  Continue reading