When it comes to your investments during retirement, you need all three of these things:
But you can’t get all three without diversifying your assets; you can get only two at best from each asset type. Here is an example showing the types of assets that offer safety, liquidity or gains:
A) Bank investments are usually both liquid and safe, offering FDIC insurance up to a total of $250,000 for your checking, savings, money markets, and CDs held at each bank.
B) Other asset types—like fixed-indexed annuities, rental real estate, and alternative investments are options that are not as liquid, but provide safety and potential growth with guarantees backed by the claims-paying ability and financial strength of insurance companies.
C) Investments like stocks, bonds, mutual funds, 401(k)s, and IRAs invested in stock market instruments offer no safety, because they are subject to stock market losses. They can provide higher gains, and are liquid because you can withdraw funds, although you may be subject to capital gains, income taxes, and/or tax penalties depending on which type of account you withdraw money from.
The rule of thumb for “C” investments, offering liquidity and gains, is something called The Rule of 100. It starts with a simple equation: 100 minus your age. For example, if you are 65, 100 – 65 = 35.
The Rule of 100 says that if you are 65 years old, you should only have around 35% of your investments held in assets that are subject to market risk, and you should keep lowering that percentage as you get older.
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*Guarantees are provided by the financial strength and claims-paying ability of insurance companies, some of which have been around longer than 100 years.
