Asset allocation is a strategy that helps you choose how much money to put in stocks, bonds and cash when you invest for retirement. Simply put, asset allocation is nothing more than striking a balance among these three core asset classes.

If you're okay with a slightly hands-on approach but prefer to keep things easy, invest for retirement with a simple asset allocation model. A two- or three-fund portfolio based on mutual funds and exchange-traded funds (ETFs) makes it very easy to invest and save for retirement.

One fund targets growth, like an S&P 500 index fund or an international stock index fund. The second fund, like a total bond market fund, generates stable income. Diversify further with a third broad-market ETF or index fund. Asset allocation with only two or three funds still provides diversification, and it keeps you from having to pick and choose tons of stocks or bonds yourself.

Next, decide what percentage of your portfolio balance is invested in these two or three stock and bond funds. Your decision depends on your age and how well you tolerate risk. Investment management firm T. Rowe Price suggests the following simple allocation based on your age:

20s & 30s: 90% to 100% stocks, zero to 10% bonds

40s: 80% to 100% stocks, zero to 20% bonds

50s: 65% to 85% stocks, 15% to 35% bonds

60s: 45% to 65% stocks, 30% to 50% bonds, zero to 10% cash/cash-equivalents

70+: 30% to 50% stocks, 40% to 60% bonds, zero to 20% cash/cash-equivalents

You need to check up on your simple asset allocation portfolio occasionally to make sure the market hasn't shifted your percentage allocation away from your target mix.

And as you age, you'll need to rebalance to keep your portfolio in line with your desired risk tolerance. You can see this in the asset allocations above, which become more conservative—with more fixed-income, bond investments—as you get closer to retirement.

 

4. Invest for Retirement in Dividend-Paying Stocks

Some investors prefer to get steady, consistent income from dividend-paying stocks. While historically the stock market has provided strong average returns, it hasn't always followed a straight, predictable line upwards. The S&P 500 has seen average annual returns of about 10% for instance, punctuated by some major declines.

Some stock investors feel more comfortable locking in their profits as soon as they can. Dividend investing aims to build a portfolio of stocks that offer consistent, high dividend payments.

Companies that pay dividends are providing you with a steady share of their profits, in the form of monthly, quarterly, or annual payments. These dividend payouts can be cash or additional stock. Dividends aren't guaranteed, but they tend to be sustained over long periods because missing dividend payments can be interpreted as a sign that a company is in bad financial health.

You should probably avoid devoting your entire retirement portfolio balance to dividend stocks. Because the companies that pay dividends tend to be more established, they may not offer the same exponential growth in share prices as newer, smaller companies. It is, after all, easier to double your share value when it's only $20 instead of $2,000.

 

6. Invest for Retirement in Annuities

Annuities are insurance contracts that provide consistent, long-term income payments. Some people choose annuities when they invest for retirement for safety and security. And annuities are widely advertised as a safe way to provide regular paychecks in retirement.

There are a very wide variety of different annuities out there, however, and there's a lot to learn about these products. Job number one is to watch out for high costs. Some annuities can involve complicated phrasings and difficult-to-understand or hidden fees.

At first glance, annuities appear to work a lot like other investments. You buy a policy and then receive back the money you paid—and then some. They're often compared to bonds or certificates of deposit (CDs), but with higher returns. Some annuities even allow you to purchase stocks in them and benefit from stock market growth with what seems to be less risk.

There are three main types of annuity contracts. Many retirement experts recommend you stick with fixed annuities. They offer guaranteed repayments of your purchase price plus a modest return and lower fees than other types. Comparison shopping is also much easier with fixed annuities because their language and structures tend to be clearer.

The other two main types are variable annuities and index annuities. Variable annuities offer no guaranteed payments, are confusingly written, and may actually cause you to lose some of the money you paid if the investments in the annuity perform poorly.

Index annuities, also called fixed index annuities, are like a hybrid of fixed and variable annuities. They offer reduced investment growth compared to variable annuities but do come with some protection against market downturns. When you sign up for an index annuity, you will be told the maximum you can gain or lose from it in a given year.

 

question

refer to POINTS NUMBER 2, 4, AND 6. Write in the discussion here based on what you understand from what the writer tries to convey.