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Author: ANewFool2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76106  
Subject: Asset Allocation Date: 6/13/2000 3:51 PM
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My mother is considering retirement within the next 12 to 18 months. She is concerned about whether she has enough to retire and how her assets should be allocated. She is in relatively good health. She tends to be a bit conservative and feels that she should put the majority of her assets in fixed income vehicles. I argue that since she is in good health she should still keep a significant portion of her portfolio in the market, perhaps an index fund.

Also, when calculating a net figure that the retiree will be drawing from, is the assumption made that the future value of this sum will be $0? I have taken intro finance courses where we were given problems regarding the "time value of money" where we were asked to solve for the amount needed for a person at retirement when we knew the "salary", in current dollars, the assumed rate of inflation, the assumed rate of return, and the assumed life expectancy. And, in each of these problems it was assumed that the person would plan to save an amount that they would eventually exhaust by the time they died. Does this seem correct? I would appreciate any feedback the community has regarding asset allocation for those ready to retire. Thanks.


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Author: drippinfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22536 of 76106
Subject: Re: Asset Allocation Date: 6/13/2000 4:03 PM
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ANewFool2,

This is a great topic, and one that TMFPixy covered in a series of articles a couple of months ago. I have not been able to find these in the Fool archives. How can we get them reposted/reprinted?
-chester <(")>

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22537 of 76106
Subject: Re: Asset Allocation Date: 6/13/2000 4:21 PM
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"it was assumed that the person would plan to save an amount that they would eventually exhaust by the time they died. Does this seem correct?"

Yes, it seems correct. It is fine to have extra, and leave it to one's children, but it is not good to outlive your money. Therefore, in making these calculations it is well to overestimate how long you think you might live. Since your mother is in good health, if her parents lived to be old and died a natural death, one might add 10 years to the age at death of the older of her parents as a starting point.
Personally, <g>, I use 120.
Best wishes, Chris

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22538 of 76106
Subject: Re: Asset Allocation Date: 6/13/2000 4:40 PM
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Chester writes:

They are the sixth, seventh and eighth articles in the Managing Your Retirement area at http://www.fool.com/retirement/manageretirement/manageretirement1.htm?ref=G02C04. The first of those three, "Investing Your Nest Egg" can be found at http://www.fool.com/retirement/manageretirement/manageretirement6.htm.

Regards..Pixy

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Author: drippinfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22539 of 76106
Subject: Re: Asset Allocation Date: 6/13/2000 5:13 PM
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Pixy,

There was one other article you wrote about keeping a five-year reserve out of the stock market. The backdrop for the article was a graduation ceremony at West Point. Can you point me to that article? Hope I'm not getting to be a pain.
-Chester :)

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22549 of 76106
Subject: Re: Asset Allocation Date: 6/13/2000 8:39 PM
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Also, when calculating a net figure that the retiree will be drawing from, is the assumption made that the future value of
this sum will be $0? I have taken intro finance courses where we were given problems regarding the "time value of
money" where we were asked to solve for the amount needed for a person at retirement when we knew the "salary", in
current dollars, the assumed rate of inflation, the assumed rate of return, and the assumed life expectancy. And, in each
of these problems it was assumed that the person would plan to save an amount that they would eventually exhaust by
the time they died. Does this seem correct? I would appreciate any feedback the community has regarding asset
allocation for those ready to retire. Thanks.


The example works well for class but not real life.

Can you predict the date anyone will die? You could be wrong by years. In fact, if ones life expectancy is say 80, then there is a 50/50 chance that they die before 80 or live more than 80 years. Therefore you have to add a few years to the life expectance when you do the calculation.

The other major problem, and this is the one we would all like to solve, we do not know the rate of return. Since the market goes up and down an assumed 10% annual return for 20 years in your calculations could overstate your nest egg by thousands.

You are correct that she should not invest only in fixed income securities. This has more risk, because of inflation, than a portfolio with some stocks. The index fund is a good idea.


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22562 of 76106
Subject: Re: Asset Allocation Date: 6/14/2000 6:57 AM
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Chester writes:

<<There was one other article you wrote about keeping a five-year reserve out of the stock market. The backdrop for the article was a graduation ceremony at West Point. Can you point me to that article? Hope I'm not getting to be a pain.>>

You're looking for the 4/10/00 piece entitled "What, Me Worry About A Meltdown." You can get to it through the Retirement Portfolio archives at http://www.fool.com/retirement/retireeport/2000/retireeport2000.htm.

Regards..Pixy

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Author: drippinfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22567 of 76106
Subject: Re: Asset Allocation Date: 6/14/2000 12:24 PM
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Bingo! Many thanks.
-Chester :)

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