Asset Allocation in Retirement - SmartAsset (2024)

Asset Allocation in Retirement - SmartAsset (1)

The general rule for asset allocation in retirement is this: You should shift toward more conservative investments once you retire, since you no longer have an active income with which to replace losses. However, you will need this money for decades to come, so you shouldn’t completely abandon your growth-oriented positions. And therefore strike the exact balance based on your personal spending needs. Here are three steps to set up your asset allocation for retirement.

Afinancial advisor could help you create a financial plan for your retirement needs and goals.

1. Set Your Goals, Then Adjust Over Time

When planning for retirement, it’s important to plan for two issues:

Life expectancy. According to OECD data, the average 65 year old American can expect to live another 18 – 20 years. However, retirees should not plan for that number. An American in good health can often expect to live well into their 80s and 90s, and for people currently making their retirement plans there’s good reason to think that will continue to extend.

If you retire at 65, it’s wise to plan for at least 30 years’ worth of money. More, if possible. This means that you’ll need a large enough nest egg to last you for years to come. It also means that inflation should be a real part of your planning. Even 2% (the Federal Reserve’s target rate of inflation) can take a real bite out of your savings when compounded over decades.

Lifestyle.Retirees who want to travel and have adventures will need more cash on hand than those who want to fish and catch up on their favorite movies. If you have significant health care needs by age 65, you will want to plan for more medical expenses than someone who enters retirement healthy. Your needs and preferences in retirement will determine your spending, which in turn will determine how you need to plan your finances.

Together, your life expectancy and life style will help you understand how you need to structure your finances as your retirement goes forward. The earlier you retire, the more you need to conserve your money for the future. Meanwhile, the more you plan on spending, the more money your account will need to generate.

This means that your needs will generally change as your retirement goes on, so your asset allocation should too. Your financial plan at 65, when you may have many more years to come and the relative youth and health to spend more freely, will likely look very different from your asset allocation at 85.

2. Allocate Assets to Manage Your Risk

Asset Allocation in Retirement - SmartAsset (2)

The rule of thumb when it comes to managing your retirement portfolio is that you should be more aggressive earlier. The younger you are, the more time you have to replace any losses that you take from higher-risk assets. Then, as you age, you should shift money into more conservative assets. This will help protect you against risk when you have less time to earn back your money.

By the time you enter retirement itself, you should shift your assets in a generally conservative direction overall. This reflects the fact that you don’t intend to work again, so you’ll have to make up any portfolio losses with future gains andSocial Security.

This is generally a wise strategy. The two most common lower-risk assets for a retirement account are:

  • Bonds
  • Certificates of Deposit

Bonds are corporate, or sometimes municipal government, debt notes. They generate a return based on the interest payments made by the borrowing entity. Most bonds tend to be relatively secure investment products, since large institutions generally pay their debts (and have assets to collect on if they don’t).

Certificates of deposit are low-risk, low-return products offered by banks. You make a deposit with the bank and agree not to withdraw it for a minimum period of time. In return they pay you a higher interest rate than normal.

Both bonds and CDs are considered low-risk assets. Bonds give you a better return, but retain some element of risk, while CDs give you a fairly low return but with about as little risk as you can get.

In fact, CDs are even lower risk than simply holding your money in cash, since ordinarily they pay interest rates that keep your money somewhat consistent with inflation. (Although at time of writing this is not the case due to high rates of inflation.)

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

3. Plan for Growth Based on Your Spending Needs

Asset Allocation in Retirement - SmartAsset (3)

The most important test when it comes to deciding your retirement portfolio asset allocation is how it will generate money relative to how you plan on spending money.

Many retirement advisors recommend that you should plan on replacing about 75% of your income in retirement. That is, if you currently earn and live on $100,000 per year, you should anticipate needing $75,000 per year in retirement. This gives you a number to test your retirement account against.

As you plan for your portfolio’s asset allocation, how close are you to that number? (Although don’t forget that your retirement account doesn’t need to necessarily replace all of your income. Social Security will most likely contribute at least something to your retirement income.)

In an ideal scenario, your portfolio can hit “replacement rate.” That means that your portfolio grows as quickly as you withdraw money from it. In theory, if you can hit replacement rate with your money, you can live off of your retirement savings indefinitely without ever drawing down on your principal. However that requires a pretty generous nest egg, and for most retirees is probably out of reach.

Either way, your portfolio will need an element of growth. If you have just entered retirement, you will hopefully have many long, healthy years to look forward to. Twenty or thirty years is simply too long for your entire portfolio to languish with low-growth certificates of deposit, especially considering that many retirees will need to live off this account for almost as long as they spent building it.

Generally speaking, the two most recommend asset classes for growth-oriented portfolios are:

  • Stocks
  • Funds

By stocks, we mean shares of individual businesses that you own. These can be some of the most volatile assets on the market, which is both a good and a bad thing when it comes to returns.

Funds can include a wide spectrum of options. Generally speaking you will be investing in mutual funds or ETFs. Some investors can pursue aggressive, high-growth funds that seek to outperform the market at large. However most investors will put their money in a standard index fund, typically one pegged to the S&P 500.

The more money you keep in stocks, index funds and growth-oriented funds, the more your portfolio can grow during your retirement.

While, again, this depends entirely on your individual needs, many retirement advisors recommend higher-growth assets around the following proportions:

  • Age 65 – 70: 50% to 60% of your portfolio
  • Age 70 – 75: 40% to 50% of your portfolio, with fewer individual stocks and more funds to mitigate some risk
  • Age 75+: 30% to 40% of your portfolio, with as few individual stocks as possible and generally closer to 30% for most investors

While this is often a successful asset allocation, once again build it around your personal needs. Specifically, if you find that you can generate returns at or near your personal replacement rate with a more conservative portfolio, that’s generally wise. Your goal is to meet your financial needs with the least risk possible.

Bottom Line

Asset allocation in your portfolio does not stop once you enter retirement. You want a conservative portfolio overall once you retire, but with more growth-oriented assets when you’re in your 60s and early 70s.

Investing Tips for Retirement

  • Afinancial advisorcan help you put a financial plan for your retirement into action. Finding afinancialadvisordoesn’thaveto behard. SmartAsset’s free toolmatches you with up to three vettedfinancialadvisorswho serve your area, and you can interview youradvisormatches at no cost to decide which one is right for you. If you’re ready to find anadvisorwho can help you achieve yourfinancialgoals,get started now.
  • In addition to your pension or retirement plan, here are five additional ways to get guaranteed retirement income.

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Asset Allocation in Retirement - SmartAsset (2024)

FAQs

What is the best asset allocation for retirees? ›

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.

What is the 12 20 80 asset allocation rule? ›

Set aside 12 months of your expenses in liquid fund to take care of emergencies. Invest 20% of your investable surplus into gold, that generally has an inverse correlation with equity. Allocate the balance 80% of your investable surplus in a diversified equity portfolio.

What percentage of assets should be in retirement accounts? ›

Reasons Why You Should Aim to Save 15% for Retirement

Household income grows at 5% until age 45 and 3% (the assumed inflation rate) thereafter. Investment returns before retirement are 7% before taxes, and savings grow tax-deferred.

What is the 70% rule for retirement? ›

One rule of thumb is that you'll need 70% of your pre-retirement yearly salary to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when you kiss the office good-bye.

What should a 60 year old asset allocation be? ›

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 is the golden rule of asset allocation? ›

Rule of Thumb for Asset Allocation based on age of investor

You can use the thumb rule to find your equity allocation by subtracting your current age from 100. It means that as you grow older, your asset allocation needs to move from equity funds towards debt funds and fixed income investments.

Should a 70-year-old be in the stock market? ›

Indeed, a good mix of equities (yes, even at age 70), bonds and cash can help you achieve long-term success, pros say. One rough rule of thumb is that the percentage of your money invested in stocks should equal 110 minus your age, which in your case would be 40%. The rest should be in bonds and cash.

What is a good portfolio for a 75 year old? ›

But now that Americans are living longer, that formula has changed to 110 or 120 minus your age — meaning that if you're 75, you should have 35% to 45% of your portfolio in stocks. Using this formula, if your portfolio totals $100,000, then you should have no less than $35,000 in stocks and no more than $45,000.

What is the perfect asset allocation? ›

A good asset allocation varies by individual and can depend on various factors, including age, financial targets, and appetite for risk. Historically, an asset allocation of 60% stocks and 40% bonds was considered optimal.

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 is the asset allocation rule for retirement age? ›

Once you're retired, you may prefer a more conservative allocation of 50% in stocks and 50% in bonds. Again, adjust this ratio based on your risk tolerance. Hold any money you'll need within the next five years in cash or investment-grade bonds with varying maturity dates. Keep your emergency fund entirely in cash.

How many people have $1,000,000 in retirement savings? ›

Employee Benefit Research Institute (EBRI) data estimates that just 3.2% of Americans have $1 million or more in their retirement accounts. Here's how much most Americans have saved and what you can do to boost your retirement savings. Don't miss out: Click to see our list of best high-yield savings accounts.

What percentage of retirees have $2 million dollars? ›

According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.

What is the best asset mix for retirement? ›

Some financial advisors recommend a mix of 60% stocks, 35% fixed income, and 5% cash when an investor is in their 60s. So, at age 55, and if you're still working and investing, you might consider that allocation or something with even more growth potential.

What is the most valuable asset in a retirement plan? ›

Your Home. If your employee retirement plan isn't your largest retirement asset, then your home very well could be. While you may not have any plans to sell your house anytime soon, it's essential to account for the value of your home and think of it as an asset.

How much does the average retiree have in assets? ›

Average retirement savings balance by age
Age groupAverage retirement savings balance amount
55-64$537,560.
65-74$609,230.
75 and older$462,4100.
Source: Federal Reserve Board
3 more rows
May 7, 2024

What is the most successful asset allocation? ›

Your ideal asset allocation is the mix of investments, from most aggressive to safest, that will earn the total return over time that you need. The mix includes stocks, bonds, and cash or money market securities. The percentage of your portfolio you devote to each depends on your time frame and your tolerance for risk.

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