Best Asset Mix For Retirement


Invest The Rest Of Your Portfolio

3 Asset Allocation Strategies for Retirement | Investing 101 | Financial Independence

When it comes to the rest of your portfolio, remember that your overarching goal is to create a mix of investments that work together to preserve capital, generate income and grow. Your specific mix of stock, bond and cash investments should be appropriate for your age, income needs, financial goals, time horizon and comfort with risk.

With a year’s worth of cash on hand and a short-term reserve in place, invest the remainder of your portfolio in investments that align with your goals and risk tolerance. For example, it’s perfectly acceptable to focus on growth in the early years of retirement in order to take advantage of potential compounding to continue to grow savings for expenses later in retirement or a legacy, depending on goals and time horizon. As you move through retirement, you may want to shift to a more conservative investing approach that seeks to preserve capital and generate income.

What If There Is A Bear At Year Eleven

Figure 7

SORR starts at year 11 above. In this setting, the 60/40 portfolio beats both of the Glide portfolios despite return assumptions. This can be visualized below.

Figure 8

When SORR strikes at year 11 of retirement with low assumed return rates, 100% bonds do better than 100% stocks .

The 60/40 portfolio is less effected by the negative returns during SORR than Glide20 which is slowing increasing in stock percentage. As a result, 60/40 has more after SORR has passed and also after 30 years.

Almost Retirement: Your 50s And 60s

Sample Asset Allocation:

  • Stocks: 50% to 60%
  • Bonds: 40% to 50%

Since youre getting closer to retirement age, now is not the time to lose focus. If you spent your younger years putting money in the latest hot stocks, you need to be more conservative the closer you get to actually needing your retirement savings.

Switching some of your investments to more stable, low-earning funds like bonds and money markets can be a good choice if you dont want to risk having all your money on the table. Now is also the time to take note of what you have and start thinking about when might be a good time for you to actually retire. Getting professional advice can be a good step to feeling secure in choosing the right time to walk away.

Another approach is to play catch-up by socking more money away. The IRS allows people approaching retirement to put more of their income into investment accounts. Workers who are 50 and older can contribute an additional $6,500 per year to a 401called a catch-up contributionfor 2022. In other words, those aged 50 and over can add a total of $27,000 to their 401 or in 2022. If you have a traditional or Roth IRA, the 2022 contribution limit is $7,000 if you’re aged 50 or older.

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Rising Equity Glidepaths Or Bond Tents For A Traditional Retiree

So, does a traditional retiree need a bond tent or a rising equity glidepath?

What asset allocation is ideal before, during, and after retirement to prevent your nest egg expiring before you do? Or, if you have legacy or charitable goals, is there a way to juice your returns?

Lets compare a couple different styles of rising equity glidepaths with a standard 60/40 stocks to bonds portfolio and see how they do under stress from SORR.

Asset Allocation In Retirement: 2022 Guide

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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 shouldnt 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 in 2022.

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

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Asset Allocation Models By Age A Table

To illustrate this idea of asset allocation shifting as time passes, below is a table showing various hypothetical asset allocations models by age for three hypothetical risk tolerances. This will give you an idea of what yours might look like and how it will change as you get older. As a simplistic example, Ill use:

Low risk tolerance = age in bondsMedium risk tolerance = age minus 10High risk tolerance = age minus 20

Remember, asset allocation is written as a ratio of stocks to bonds, such as 80/20, which means 80% stocks and 20% bonds.

10/90 20/80

Vanguard has a useful page showing historical returns and risk metrics for different asset allocation models that may help your decision process. Once again, use this as an informational tool in your arsenal, but also remember that same performance seen on that page may not occur in the future.

Retirement: 70s And 80s

  • Stocks: 30% to 50%
  • Bonds: 50% to 70%

You’re likely retired by nowor will be very soonso it’s time to shift your focus from growth to income. Still, that doesn’t mean you want to cash out all your stocks. Focus on stocks that provide dividend income and add to your bond holdings.

At this stage, you’ll probably collect Social Security retirement benefits, a company pension , and in the year you turn 72, you’ll probably start taking required minimum distributions from your retirement accounts.

Make sure you take those RMDs on timethere’s a 50% penalty on any amount that you should have withdrawn but didn’t. If you have a Roth IRA, you don’t have to take RMDs, so you can leave the account to grow for your heirs if you don’t need the money.

Should you still be working, by the way, you won’t owe RMDs on the 401 you have at the company where you’re employed. And you can still contribute to an IRA if you have eligible earned income that doesn’t exceed the IRS income thresholds.

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Fixing The Pension Fund Mix

Reprint: F0403E

Wise allocation of assets across both stocks and bonds can help companies reap higher returns from an asset mix that includes equities, without assuming unacceptable risk.

After a steep decline in the global stock markets and a recovery that is still uncertain, long-term bonds look more attractive to some managers of defined-benefit pension plans. A few companies, such as British retailer Boots, have invested all of their DB plan assets in long-term bonds, and several commentators have broadly promoted this investment strategy.

This may make sense for the limited number of DB plans whose funding obligations can be fully met by the expected returns from a diversified portfolio of highly rated bonds, which currently yield about 5%. But this would not be an attractive strategy for most companies, considering that U.S. interest rates are at 40-year lows and deficits in DB plans are rising sharply. With the demise of the 30-year U.S. Treasury bond, it will also be difficult to match high-quality bonds against the long-term funding obligations of DB plans without taking significant reinvestment risk. As a result, most companies are still looking to equities to stop the pension-fund hemorrhage over the long term. How do companies seek higher returns from an asset mix that includes equities, without assuming unacceptable risk?

To improve the quality of asset allocation, trustees should follow these steps.

Harvard Business Review

What Is An Income Portfolio

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An income portfolio is designed to offer long-term sustainability through a generally conservative strategy of bonds, mortgage-backed securities, stocks and other investments that pay interest or dividends. The goal is to generate an income stream that can compound and increase the value of your investment. It also seeks to provide protection that often appeals to pre-retirees.

How to build an income portfolio

If youre looking to build an income portfolio, consider the following strategies:

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You Save For Retirement And Then You Retire Yet The Questions Keep Coming: How Much Should Be Invested In Stocks Vs Bonds How Long Will Your Portfolio Last A New Analytic Tool Could Help Investors Optimize Their Asset Allocation To Better Fund Those Golden Years

The coverage ratio is superior to the failure rate because it overcomes the latter’s two basic flaws.

There’s a lot to consider when choosing the best wealth management strategy during retirement. Most importantly, your investments should provide funds to sustain you throughout your post-retirement life. Another goal may be to bequeath leftover money to family or to charity.

The usual metric for evaluating different investment strategies is the “failure rate.” An investment strategy “fails” if it doesn’t provide funds throughout the planned retirement horizon — say, 30 years. However, the failure rate has two important weaknesses: it provides no insight as to when the strategy failed — for example, whether in year 5 or year 29 of a 30-year plan — and it does not record if a strategy left a surplus in the end.

Introducing the coverage ratio

To address the shortcomings of the failure rate and provide more information about different retirement investment strategies, IESE’s Javier Estrada and Mark Kritzman of Windham Capital Management have developed a new metric they call the coverage ratio. This calculation essentially measures the number of years of withdrawals supported by a particular strategy, relative to the length of the retirement period considered.

Applying the coverage ratio

Using this framework, the researchers look at both historical and simulated scenarios to suggest optimal asset allocation strategies for stocks and bonds.

Methodology, very briefly

Don’t Let Stock Market Conditions Dictate Your Allocation Strategy

When the economy is performing well, it’s tempting to believe that the stock market will continue to rise forever, and that belief may encourage you to chase higher profits by holding more stocks. This is a mistake. Follow a planned asset allocation strategy precisely because you can’t time the market and don’t know when a correction is coming. If you let market conditions influence your allocation strategy, then you’re not actually following a strategy.

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Plan For Growth Based On Your Spending Needs

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 portfolios asset allocation, how close are you to that number?

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:

Allocate Assets To Manage Your Risk

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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 dont intend to work again, so youll have to make up any portfolio losses with future gains and Social Security.

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

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 .

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.

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When Should I Start A Retirement Portfolio

  • Early in your career as you begin saving for retirement, you may want to accumulate as high a balance as possible. A growth portfolio is a good option for investors with a longer term horizon.
  • As you mature in your career, a balanced portfolio can help retain a moderate amount of growth, but with less allocation towards stocks to help protect against market volatility.
  • Closer to and in retirement, an income portfolio can provide long-term sustainability with a greater allocation towards bonds.

The 60/40 Portfolio: A Phoenix Or A Dud For Retirees

By Jonathan Chevreau on October 26, 2022

Retired or near retirement and rethinking the classic balanced asset allocation? Heres the debatethats not really a debateon the 60/40 portfolio.

For Canadian investors, one of the biggest shocks of 2022 is how poorly balanced mutual funds, exchange-traded funds and portfolios have performed. Investors with funds based on the classic pension fund asset allocation of 60% in stocks and 40% in bonds have been bewildered to experience losses on both sides of the equation. In normal times, the idea is that steady-eddy bonds typically provide modest gains to offset any bear-market losses sustained by the stock holdings in a down market.

But these are not normal times.

Case in point: a fund I own in various accounts, VBAL or Vanguard Balanced ETF Portfolio. When I last checked, it was down 15% year to date, as of early October.

Im not picking on Vanguard hereyou could say the same of its direct rival equivalents, BMOs ZBAL and iShares XBAL, and so on.

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S To The Best Asset Allocation Strategy

In general, there are 5 basic steps to arriving at an asset allocation strategy tailored to you and your needs in retirement:

  • Determine how much you need and want to spend in what time periods. The more accurate you are, the better. Here are 9 Tips for Predicting Your Retirement Expenses.
  • Figure out how much reliable income you will have from sources other than savings.
  • Next, you need to calculate the difference between what you need to spend and your reliable income. You should also think about the difference between what you want to spend and your reliable income. The NewRetirement retirement planning calculator can help you with this analysis.
  • Assess whether you have additional goals for your money.
  • Once you know how much income youll need from your savings in any given year and you have determined any additional goals, then you can figure out how to best allocate assets to make sure the money is available when you need it.
  • Money that you need right away should be in cash. Money that youll want within the next few years might be held in bonds. Money that you might use in 10 plus years could possibly be in mutual funds, or perhaps stocks. Assets that are earmarked for leaving a legacy could possibly be in the riskiest types of investments depending on your risk tolerance.

    Stick With Your Plan:

    Stop Worrying About Asset Allocation in Retirement

    Buy Low, Sell High – Shifting money away from an asset category when it is doing well in favor an asset category that is doing poorly may not be easy, but it can be a wise move. By cutting back on the current winners and adding more of the current so-called losers, rebalancing forces you to buy low and sell high.

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    A Retirement Expert Addresses Questions Often Asked About Retirement Finances And Other Issues

    I plan to retire next year, but Im worried about a repeat of 2008-09 in the markets. Is there a best asset allocation for someone entering retirement?

    The best allocation for any investor is the one where the mix of stocks, bonds, cash and alternative investments allows you to sleep at night. That said, this question raises a good point: A nasty bear market early in retirement, coupled with steady withdrawals from a nest egg, can quickly drain ones savings.

    The traditional advice is to subtract your age from 100, which gives you the percentage of assets you should hold in stocks. As you age, you gradually shift the bulk of your portfolio to the relative safety of bonds.

    Ask a Question

    Today, many advisersgiven increases in life expectancyare urging would-be retirees to tweak this formula and subtract ones age from 110 or even 120. This means individuals age 65 would have 45% or 55% of their holdings in stocks, which, presumably, would help generate the growth needed for a long retirement.

    That is all well and good. But ask yourself: Could you stomach a drop of almost 40% in the S& P 500 if half of your nest egg was invested in stocks?

    Journal Report

    The bonus: You have better downside protection in the early years of retirement, because if a bear market hits, you are less likely to have to sell stocks whose values are depressed as a result.

    Appeared in the September 6, 2016, print edition.


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