The Asset Allocation Puzzle

Possessing a considerable amount of knowledge about stocks, bonds, and cash is only a small part of the investment planning process. Many investors are under the false notion that the greatest determinant of
portfolio performance is the specific investment choices they make. Actually, the biggest decision you will make is how much to allocate to different investment categories.

Asset allocation is all about finding the mix of investments that is right for your situation. Goals, time horizon, risk tolerance and risk capacity are some of the key factors that should be considered when allocating assets.

Goals

Determining what asset allocation is appropriate depends largely on the goals you seek to achieve. Are you saving for retirement, college education for your children, or a vacation home? Each goal must be considered in creating the appropriate asset mix.

Time horizon

Time horizon is the length of time a portfolio will remain invested before withdrawals are made. If your investment horizon is fairly short, you’d likely want a more conservative portfolio—one with returns that do not fluctuate much. If your investment horizon is longer, you could invest more aggressively.

Risk Tolerance

Everyone has a different emotional reaction to sudden changes in their portfolio value. Some people have trouble sleeping at night, while others are unfazed by fluctuations in the market. Risk tolerance is a personal preference and should be tailored to you specifically. However, when determining an appropriate asset allocation mix, it is important to consider not only one’s risk tolerance, but also one’s risk capacity.

Risk Capacity

An investor’s risk tolerance refers to his or her aversion to risk, while an investor’s risk capacity relates to his or her ability to assume risk. Sometimes, an investor’s risk capacity and risk tolerance do not match
up. If an investor’s capacity to take risk is low but the risk tolerance is high, then the portfolio should be reallocated more conservatively to prevent taking unnecessary risk. On the other hand, if an investor’s risk capacity is high but the risk tolerance is low, reallocating the portfolio more aggressively may be necessary to meet future return goals. In either
case, speaking with a financial advisor may help to determine if your risk tolerance and risk capacity are in sync.

Have questions or need a second opinion? Contact us today to learn more or to schedule a free consultation.

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Social Security: Myths vs. Facts

Dispelling some misperceptions about the program.

Some myths & misperceptions keep circulating about Social Security. These are worth dispelling, as more and more baby boomers are becoming eligible for their retirement benefits.

Myth #1: Social Security will go away before you do. The federal government has announced that Social Security may become insolvent between 2033 and 2037 if no action is taken – but it is practically a given that Congress will act on the program’s behalf. Social Security provides 40% of the total income of the 40 million Americans receiving retirement benefits.1

Did you know that Social Security has had a surplus each year since 1984? That situation is about to change. By about 2020, the program is projected to face a deficit, which it will tap incoming interest payments to offset. It will only be able to use that tactic until the mid-2030s. The program will not “run dry” or go bankrupt at that point, but by some estimates, its payments to retirees could become about 25% smaller.1

Myth #2: Your Social Security benefits are “your” money. It would be a fitting reward if your Social Security income represented the return of all the payroll taxes you had paid through the years. Unfortunately, that is not the case. The payroll taxes you paid decades ago funded the Social Security benefits that went to retirees at that time. Your Social Security benefits will be funded by the payroll taxes that a younger generation pays.2

Myth #3: Social Security income is tax-free. In reality, up to 85% of your Social Security income may be taxed. Social Security uses a formula to determine the taxable amount, which is as follows: adjusted gross income + nontaxable interest + one-half of your Social Security benefit = your combined income. Single filers with combined incomes between $25,000-$34,000, and joint filers with combined incomes between $32,000-$44,000, may have as much as 50% of their benefits taxed. Single filers with combined incomes above $34,000, and joint filers with combined incomes above $44,000, may have up to 85% of their benefits subject to taxation.2

Myth #4: If you have never worked, you will never get Social Security benefits. This is not necessarily true.

Generally speaking, you have to work at least ten years to become eligible for Social Security income. That is, you have to spend ten or more years at jobs in which you pay Social Security taxes; you have to pay into the system to get something back from the system. Unfortunately, caregiving and child-rearing do not qualify you for Social Security.1

To get technical about it, you must accumulate 40 “credits” to become eligible for benefits. When you receive $1,260 in earned income, you get one credit. Another $1,260 in earned income brings you another credit, and so forth. You can receive up to four credits per year. Most people will collect their 40 credits in a decade; though others will take longer.1  If you have never worked, or worked for less than 10 years, you could still qualify for Social Security on the earnings record of your spouse, your ex-spouse, or your late spouse. A widow can choose to collect up to 100% of a deceased spouse’s monthly benefit; a married spouse can collect up to 50% of the other spouse’s monthly benefit. If you have divorced, you may still file for Social Security benefits based on your ex-spouse’s earnings record – provided that the marriage lasted ten years or longer and you have not married again.1

For more information about Social Security call us today for your free consultation.

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.    Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.  Insurance products and services are offered and sold through Perry Financial Group and individually licensed and appointed insurance agents.
Citations.
1 – fool.com/retirement/2016/07/18/12-jaw-dropping-stats-about-social-security.aspx [7/18/16]
2 – usatoday.com/story/money/personalfinance/2016/04/03/social-security-facts/81883222/ [4/3/16]