Saving for Retirement? Try The Picnic Basket Approach

Summer is here, and who doesn’t like to pack a picnic and go on a drive or a hike and enjoy the beautiful outdoors? Sometimes your picnic might be quick grab and go items from a store or deli. Sometimes you might put a lot of thought into it, cooking or baking some special items to include. Maybe you shopped for the perfect beverages, plates, utensils, and condiments.

From the outside, our baskets may look similar. The contents on the inside make all the difference in your picnic experience.

Often clients reviewing their retirement accounts have a similar approach. They look at the balance on their savings statement and comment if it’s up or down but have not given a lot of thought on the details inside the account.

What’s In Your Basket?

First, we need to look at the type of basket (account) you are using – IRA, 401k, 403b, etc.  You may have several baskets to choose from.

There are limits on how much you can add to some of the baskets each year (retirement plan contributions have limits). You also need to consider how the items are taxed when you start taking them out of the basket.

The items in each basket are your actual investments, bonds, mutual funds, stocks, etc. You want to have a good variety of items in your basket. This is what’s meant by building a diverse portfolio. You don’t want to go on a picnic with only chicken in your basket. You need some sides, snacks, and dessert to be more complete. You don’t want one dish to be too full or too heavy; you need to have a good balance (asset allocation) for your picnic (retirement) to be successful.

Allocation and Diversification

Asset allocation and diversification are important. When it comes to investing, asset allocation is the equivalent of deciding how many of your eggs you are going to put into how many different baskets or asset classes.

Diversification is the spreading of your investments both among and within different asset classes, such as U.S. stocks, international stocks, large, medium, or small companies, emerging markets, government or corporate bonds, and even alternatives like real estate, gold or cryptocurrencies.

Allocation and diversification decrease risk and provide some stability. You want to have some assets that are not correlated with each other. Just like you don’t want your picnic basket to be filled with only salty or only sweet items. Bonds may go up one month while stocks may go down. Perhaps foreign emerging markets have a great year while the US market suffers.

You also want to diversify by sector. Sectors include technology, consumer, energy, financial services, communication services, healthcare and more. Your portfolio should be exposed to many different types of industries to protect your money against sector underperformance.

Now is a good time to review your investment basket with your financial professional.

The information contained in this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional for your specific situation.

Filed under: Dollars & Sense, Life, News
Profile photo of Penny Wasem, CPA, CFP, PFS, owner of Lifetime Financial Planning Solutions in Lancaster, Ohio.

By Penny Wasem, CPA, CFP, PFS

Penny L. Wasem is the owner of Lifetime Financial Planning Solutions, LLC. A summa cum laude graduate of Ohio University, Penny earned a Bachelor of Business Administration with focus in accounting and mathematics. She serves on the board of The Fairfield Medical Center Foundation, is a member of the Investment Committee of The Fairfield County Foundation and has been active on many non-profit boards in the community. Penny lives in Lancaster with her husband Eric Hubbard and is parent to Clark and Olivia Hubbard.