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Dear Gen Xers: Let’s Talk About Your Investment Strategy

Prosperity Financial Group is the leading fiduciary financial planning firm for Gen X and Millennial clients.

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Born between 1965 to 1980, your generation rocked out to Fleetwood Mac on your Walkman, laughed along to Seinfeld and Friends, and survived the Y2K apocalypse. But you are so much more than “My Sharona.”

At this point in life, you’re juggling many competing costs: paying down your mortgage, taking care of your aging parents, and financing your children’s education. Making room for all of your financial goals will always be a challenge, but in your 40s and 50s, your investment strategy needs to be front and center.

But the optimal asset allocation will look different for everyone. There is no “correct” asset allocation because everybody brings home a different salary, has different risk tolerances, and wants different things in life. The important thing to understand is that the market is far too complex and dynamic to support a set-it-and-forget-it investing strategy. There are, however, optimal asset allocation guidelines for your current life stage.

In general, you’ll want to minimize risk as you move closer toward retirement. Everyone understands that you’ll be in trouble if you allocate too much to stocks, and the stock market takes a nosedive in the year before you want to retire. But you’ll also be in trouble if you allocate too much to bonds over your career, and aren’t able to build enough capital to retire at all.

Here’s our 7-step framework for how to invest for retirement as a Gen Xer.

risk-averse, moderate, or risk-loving

Step 1: Begin with the end in mind.

Every strategy should be guided by your end goals.

  • What are your short-term objectives? What are your liquidity needs?
  • What are your long-term investment objectives? What type of lifestyle would you like to have in retirement?
  • When would you like to withdraw your money?

Your goals, and when you’ll need the money, will dictate the types of assets you should invest in. If you don’t need your money for 10 or 20 years, you’re better off investing in riskier, higher-return assets like stocks. Why? While stocks have a much higher probability of losing value in short timeframes, the longer you hang on to them, the odds of losing money drops dramatically — even to zero in some cases.

Step 2: Assess your risk tolerance.

Your optimal investing strategy depends on your risk tolerance. Do you value safety or growth? Ask yourself the following questions to find out.

Example A: Which one sounds more like you?

My goal is to minimize swings in my portfolio’s value, even if growth does not keep pace with inflation.

My goal is for growth to at least keep pace with inflation, with the risk of modest swings in my portfolio’s value.

My goal is for growth to exceed inflation, with the risk of moderate swings in my portfolio’s value.

My goal is for growth to significantly exceed inflation, with the risk of larger swings in my portfolio’s value.

Example B: Suppose that you are 80% invested in securities. If the stock market were to experience a prolonged down market, losing 50% of its value over a 3-year period, what would you do (assuming your securities behaved in a similar fashion)?

Sell all the securities in your portfolio. You are afraid that the stock market is in a downturn and you cannot afford the decrease in value.

Sell half. You think that the market may rebound, but you are not willing to leave all of your investment exposed to further loss.

Hold. You understand that your investment may be subject to short-term price swings and are comfortable ‘weathering the storm’.

Buy more securities for your portfolio to take advantage of their low price. You are comfortable with market fluctuations and assume that the securities will potentially regain their previous value or increase in value.

These are good starting points in figuring out whether you are risk-averse, moderate, or risk-loving.

While it may be true that you should reduce risk as you approach retirement, be careful not to back away too soon — you could risk stunting your investment growth.

If you aren’t sure how much risk you should be taking on, we offer a complimentary portfolio review. Call our San Ramon, CA office or email elliot@prosperityfg.comto book yours today!

Elliot Kallen

Registered PrincipalProsperity Financial Group

Step 3: Diversify well.

Consider which assets work best for you according to your appetite for risk.

Do you have an eye for fine art or vintage cars? You may want to diversify with passion assets.

Are you enthralled by the markets and unperturbed by volatility? Equities might be for you.

Do you prefer owning a stable, predictable hard asset? Real estate might be your answer.

First time working with a Financial Advisor?

Here are some of the questions we’ll cover in our initial consultation:

What do you want your retirement lifestyle to look like? 

Do you plan to work past retirement age?

Do you want to leave a legacy, whether to your children, grandchildren, or your favorite charity?

These questions are designed to assess all the factors that affect what you should invest in. Contact our San Ramon, CA office for your free consultation today!

Step 4: Simplify your retirement picture.

By now, you’ve likely worked at a handful of companies, and maybe even had a career change (or three).

If you opened a retirement account at each company, now is the time to tie up all your loose ends and consolidate those accounts!

After all, life is busy enough — who wants to spend time chasing down statements from five different financial institutions?

An IRA Rollover is the easiest way to do this. You can streamline your 401(k)s and 403(b)s into one central account, making it much easier to manage your investments from one dashboard. Rolling your funds into one IRA has several benefits:

  • Protection from an avoidable tax bill. When you withdraw money from a 401(k) before age 59 ½, and fail to transfer it into another account with similar tax treatment, you’ll have to pay a 10 percent early withdrawal penalty and additional income taxes for the year. That means you’d owe Uncle Sam $10,000 of that $100,000 withdrawal. Between taxes and the penalty, your immediate take-home total could be as low as $70,000 from your original $100,000.
  • A wider range of investment options. When it comes to investing through a 401(k), your choices are limited to what’s offered on the investment menu. An IRA offers access to the broader world of investments, making it easier to customize and diversify your portfolio. You’ll also be able to buy and sell your holdings anytime you want.
  • Fee transparency. 401(k)s have complex fee structures, and employees generally bear the burden of all fees. You may even be charged higher fees as an ex-employee. When investing through an IRA, you’ll save money on all those little expenses that can eat into your investment returns over the long term.
  • One central account. With all your retirement accounts in one place, it’s a lot easier to get a clear picture of your investment mix and rebalance your portfolio as needed.

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The Prosperity Difference

If you’re looking for sound, unbiased investment advice, consider a financial institution that has the Fiduciary duty to put your interests first: a Registered Investment Advisor.As a Registered Investment Advisory firm, we are regulated by the Securities and Exchange Commission, or the SEC. That means we have a fundamental obligation to act in your best interest.You’ll receive full transparency when we help you create your financial plan. Our investment recommendations are always based on what’s best for you.Sign up for your free IRA Rollover consultation today.

Step 5: Be smart about taxes.

Unfortunately, Uncle Sam will want a cut of all your investment earnings. It’s important to take advantage of all available tax planning opportunities to minimize that bite.

For example:

  • If you work for yourself or have a side business, don’t be afraid to take the home office deduction.
  • Combine work and pleasure to reduce vacation costs. Call our office at (925) 314-8500 to learn how to make this calculation correctly.
  • Deduct any private mortgage insurance premiums.
  • Avoid capital gains by moving well-performing stocks directly into a donor-advised fund.
  • Take advantage of all your state and local tax breaks.

Step 6: Ramp up your savings.

If you’re currently investing 6 percent of your earnings into your investing strategy, make it 7 percent next year and 8 percent the year after that. This escalation can give you the discipline you need to ramp up the savings over time, and that will be good news for your portfolio.

Step 7: Invest consistently.

It can be scary to stay invested and continue investing through volatile market swings, but the down years are actually the best times to buy. When the market falls, every dollar goes further, and that can make a huge difference when the market eventually recovers. Remember, this is a long-term game; don’t be swayed by short-term fluctuations.

We Can Help

Your life story, and financial needs, will evolve and change over time. We can help you create a detailed investment plan that addresses your unique needs, goals, and retirement vision.

To schedule your free investment consultation, please fill out the form below. We look forward to speaking with you.

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As your Fiduciary Registered Investment Advisory firm, we’re bound by law to put your interests above our own. We’re committed to maximizing your wealth within the constraints of your values and your life goals.

Our team of qualified and experienced experts is dedicated to building a positive, long-term relationship with you.

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