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Subject:  Re: 7 years from retirement--asset allocation? Date:  4/11/2002  9:55 PM
Author:  pauleckler Number:  34158 of 95734

Meg, the traditional Foolish approach to this problem is that you should work out what your expenses will be in retirement and then where the funds to cover those expenses will come from. The funds that come from investments should be no more than about 4% of your total invested funds. (This is called your burn rate.) You should put 5 years expenses in a laddered maturity bond portfolio. Then you live off the interest and the maturing bonds and replace that bond selling enough stocks to cover another years expenses and buy a 5 yr bond with those funds.

By this method, you will need 20% or less of your retirement funds in bonds (depending on your personal burn rate). These funds could be in your 401K plan, but that assumes you are over 59-1/2 and can take unrestricted distributions without penalty. Otherwise, you need a 72t or other distribution plan or you will want them in a taxable account (quite likely tax free munibonds).

Diversification within stocks is a personal decision. 100% S&P 500 Index funds is diversification enough for many. Other combinations can be used. The closer your needs are to that full 4%, the more you need to diversify. If you can get by on far less than 4%, then you have an additional cushion for a market downturn. Diversification is less of a problem.

Otherwise, you will not find much consensus on this subject. Some will suggest relatively large bond positions. Fools believe you are likely to be retired 30-40 years. Inflation is the major risk. Therefore, you need most of your funds in stocks to avoid outliving your funds.

You'll find various sources in Fooldom on how to do all of this. There is an online retirement seminar. There's also the Retire Early Homeboard. The Bond and Fixed Income board can help you with the bond ladder.

Best of luck to you.
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