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Hi, wondering if I can get some clarifications on allocation as you get older (for both 401k funds and regular funds). Seen articles (net and magazine) that says when you start out invest in growth and stock funds (your young, take the risk)and as you get older shift toward bond funds or just bonds and less on stock funds.(as you get older, secure your money) but one thing that is never clear to me is how.

Does one stop contributing to your existing funds and start funding a bond fund or sell existing funds to place in bond fund.

Or is it both?

information and references are appreciated.

thanks and regards
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Does one stop contributing to your existing funds and start funding a bond fund or sell existing funds to place in bond fund.

Or is it both?


Here's a couple of links on it:

http://news.morningstar.com/doc/article/0,1,4420,00.html
http://www.fool.com/retirement/retireeport/2000/retireeport000710.htm

Also, a generic retirement center from M*:
http://www.morningstar.com/Cover/Retirement.html

JB
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<<<Seen articles (net and magazine) that says when you start out invest in growth and stock funds (your young, take the risk)and as you get older shift toward bond funds or just bonds and less on stock funds.(as you get older, secure your money) but one thing that is never clear to me is how.>>>

Don't fall into the trap of thinking that bonds/bond funds are safe/safer. You can loose your money just as easily in bonds as in stocks. Just try selling a bond in a rising interest rate climate!

To keep things simple as you near retirement, keep about 5 years living expenses in CDs, the rest in stocks. At the end of each year, sell enough stocks for another year of living. You still need stocks to fight inflation, the more so if you retire early or have a history of family longevity.

JLC
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<<<You can loose your money just as easily in bonds as in stocks. Just try selling a bond in a rising interest rate climate!>>>

But you will get all you money back if you hold to maturity. It all depends on what type of obligation and from whom you have purchased and with what purpose. If you know what you are doing, you are not likely to loose money in the bonds.

Vlad
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Of course there are different approaches one can take and, in part, it depends on one's goals, risk tolerance, etc.

I have seen statements like the percent of one's portfolio that should be in equities is:

Equities (percent) = 100 - age

or

Equities (percent) = 120 - age

So someone who is, for example, 47 years old, "should" have 53% or 73% of one's portfolio in equities (stocks or stock funds). The first expression is an older one, the second seems to be newer and is accounting for the longer longjevity today than 100 years ago. These numbers would have to be revised upward for a risk taker or downward for someone more conservative.

If one follows the above expressions, one would want to adjust one's portfolio just a little every year, e.g., if one is 73% equities this year, one would want to adjust one's portfolio next year to have 72% equities.

In tax-favored accounts, it isn't that big of a deal to sell some of one's stock holdings to buy non-stock (often bond) holdings. (Yes, one can lose money in bonds, but usually not as quickly as in stocks. A number of people advocate avoiding the long bond and sticking with intermediate and short-term bonds to reduce interest rate risk. Or one can look at "cash" like CDs and money market.)

In regular (taxable) accounts, one wants to avoid selling if one can because of the tax impact, so if one is still accumulating, one would want both distributions and new money going into the part of the portfolio that is under-represented, which usually will be the non-equities portion. For more than that, one may want to look at over-compensating the tax-favored accounts so that the overall portfolio would be balanced.

Generally, it is good to avoid big changes in one's portfolio, but the drifting of the portfolio by 1% of the portfolio's value per year should be fine.

Note: the above is just one of the approaches one can take. Another approach would be 100% equities except for what one needs for 5 years, and keep that 5 years in non-equities so that if the market goes down one can live off of the non-equities, but once the market has recovered one can sell part of the equities portion of the portfolio to rebuild the 5-year non-equities part of one's portfolio.

I personally will probably remain a little on the "equities heavy" side up to retirement date because my pension would be enough to handle my ordinary living expenses (or at least it looks like it will be), so I don't expect to be using my investments early in my retirement.
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At the end of each year, sell enough stocks for another year of living.

The usual advice goes "At the end of each year, if the stock market is up for the year, sell enough stocks for another year of living and put it into a CD. If the stock market is down, just live off the most recently matured CD."
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"But you will get all you money back if you hold to maturity. It all depends on what type of obligation and from whom you have purchased and with what purpose. If you know what you are doing, you are not likely to loose money in the bonds"

Note that this applies to purchasing individual bonds.
It doesn't particularly apply to purchasing bond funds.
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