We all want to enjoy a comfortable, financially secure retirement. But saving for the future isn't enough; you'll also need to develop an ideal asset allocation strategy so that your investments allow you to achieve your long-term goals. This means ensuring that your portfolio contains a healthy mix of stocks, bonds, and even some cash. Of course, your strategy will depend on a number of factors, including your anticipated retirement length and tolerance for risk. Here, we'll review some key moves to make and points to consider as you attempt to pin down the best plan for your retirement.
What will your asset mix look like?
When we talk about asset allocation, we're generally talking about three distinct investment vehicles:
- Stocks, which are more volatile than other investments but have historically delivered the highest returns.
- Bonds, which are a less risky, income-producing investment that typically offer higher returns than cash but lower returns than stocks.
- Cash, which is generally a completely risk-free investment but offers little in the way of returns, especially in today's interest rate environment.
While there's no rule stating that you must have all three of the above in your portfolio, the typical investor incorporates each of these assets into his or her personal mix.
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Asset allocation when retirement is near
The asset allocation strategy you employ during your pre-retirement years will differ from the approach you take early on in your working years, or later on in life, once you're actually retired. Ideally, your goal leading up to retirement should be to continue growing your assets without taking on too much risk -- the reason being that you're going to need access to your investments relatively soon, and you don't want to run into a situation where your portfolio value takes a major dive just as you're about to dip in.
So what's the ideal strategy for you? Well, it will depend on a couple of things, and a big one is your tolerance for risk. Though most pre-retirees are advised to start shifting their assets into safer investments, like bonds, if you happen to have a higher-than-average appetite for risk, you might maintain a more stock-heavy portfolio. The same holds true if you have a solid backup plan for generating retirement income, such as a side business you plan to focus on once you leave your full-time career behind. This way, if your investments take a hit early on in retirement, you can leave them in place to recover and sustain yourself with the income your venture produces.
Another factor that will influence your pre-retirement asset allocation strategy is the extent to which you need to keep accumulating wealth. If, for example, you're 60 years old and have already amassed enough savings to meet your long-term needs, then you might shift heavily away from stocks. After all, there's no point in putting your portfolio at risk if you don't need more money than you currently have.
How much should you keep in stocks?
Assuming you're still looking to grow your savings over the next five to 10 years, and you have an average appetite for risk, you can take your age, subtract it from 110, and use that number to determine how much of your portfolio ought to remain in stocks. For example, if you're 60 years old, it means that 50% of your assets should be invested in stocks. You might split the other 50% between bonds (40%) and cash (10%), or whatever other percentages best meet your needs. (As a general rule, you don't want to have too much money tied up in cash, and while you most definitely need an emergency fund going into retirement, that money should be in its own separate account.)
Of course, the above formula isn't perfect, and can be tweaked as necessary to accommodate your personal circ*mstances. But it's a reasonable starting point for determining how to allocate your assets.
Clearly, there's no such thing as a one-size-fits-all approach to asset allocation. That's why you'll need to consider your retirement timeline, risk tolerance, and goals when establishing your personal strategy. Furthermore, don't forget to tweak that strategy once retirement actually begins. Your portfolio should never be something you set and forget, and the more you keep tabs on it, the better your investments are likely to serve you in the long run.
FAQs
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
What three 3 ways should you allocate your assets in retirement? ›
Here are some thoughts:
- Set aside one year of cash. At the start of every year, make sure you have enough cash on hand to supplement your annual income from annuities, pensions, Social Security, rental properties, and other recurring sources. ...
- Create a short-term reserve. ...
- Invest the rest of your portfolio.
According to this principle, individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities. The rest would comprise high-grade bonds, government debt, and other relatively safe assets.
What should my asset allocation be 10 years before retirement? ›
Advisors recommend that investors within 10 years of retirement aim for an asset mix of about 60% stocks and 40% bonds—and within those broad asset categories, it's important to be diversified.
What should a 70 year old retiree asset allocation be? ›
Retirement: 70s and 80s
Sample Asset Allocation: Stocks: 30% to 50% Bonds: 50% to 70%
What is the 95% rule retirement? ›
Under the Rule of 95, members can retire when their age plus their years of service equal 95 provided that they are at least 62 years old. For example, a member who is 62 years old could retire with 33 years of service rather than waiting until their schedule-based eligibility date (62 + 33 = 95).
What is the golden rule of asset allocation? ›
This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments. For example, a 35-year-old would allocate 65 per cent to equities and 35 per cent to debt based on this rule.
What is a good portfolio mix in retirement? ›
For most retirees, investment advisors recommend low-risk asset allocations around the following proportions: Age 65 – 70: 40% – 50% of your portfolio. Age 70 – 75: 50% – 60% of your portfolio. Age 75+: 60% – 70% of your portfolio, with an emphasis on cash-like products like certificates of deposit.
What is the 3% rule in retirement? ›
What is the 3% rule in retirement? The 3% rule in retirement says you can withdraw 3% of your retirement savings a year and avoid running out of money. Historically, retirement planners recommended withdrawing 4% per year (the 4% rule).
What does an aggressive retirement portfolio look like? ›
An aggressive investment portfolio, generally, is more weighted toward stocks (e.g. think 50% of your nest egg is invested in stocks). An aggressive portfolio may suit investors who feel they can handle a few bear markets in exchange for the possibility of overall higher returns.
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.
How much money do you need to retire with $100,000 a year income? ›
So, if you're aiming for $100,000 a year in retirement and also receiving Social Security checks, you'd need to have this amount in your portfolio: age 62: $2.1 million. age 67: $1.9 million. age 70: $1.8 million.
What is the 4% rule for retirement accounts? ›
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
What is the 10x retirement rule? ›
Fidelity's guideline: Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. Factors that will impact your personal savings goal include the age you plan to retire and the lifestyle you hope to have in retirement.
What is the 90 10 rule of retirement? ›
The 90/10 Rule of Retirement: Defined
“In preparation for retirement, most people spend 90% of their planning time on the financial issues and 10% on the non-financial issues. After retirement, the ratio reverses, and most retirees spend the vast majority of their time focusing on the non-financial issues of life.”
What is the most successful asset allocation? ›
Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.
What is the 4 rule for asset allocation? ›
One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.
What is the current recommended asset allocation? ›
The 60/40 portfolio dictates a simple split of your assets— 60% for stocks and 40% for bonds. This asset allocation is simple to apply and understand, which may appeal to investors who prefer more of a hands-off approach.
Is 70 30 a good asset allocation? ›
For example, if you're 30, you should keep 70% of your portfolio in stocks. If you're 70, you should keep 30% of your portfolio in stocks. However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age.
