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)


Asset Allocation in Retirement - SmartAsset? ›

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.

What is the recommended 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.

How much money does the average 65 year old retire with? ›

The average 401(k) balance by age
AgeAverage 401(k)Median 401(k)
3 more rows

What percentage of retirees have $3 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 should a 70 year old retiree asset allocation be? ›

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.

What is the 70% rule for retirement? ›

The 70% rule for retirement savings suggests that your estimated retirement spending should be about 70% of your pre-retirement, after-tax income. For example, if you take home $100,000 a year, your annual spending in retirement would be about $70,000, or just over $5,800 a month.

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.

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 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.

Can I retire at 62 with $400,000 in 401k? ›

If you have $400,000 in the bank you can retire early at age 62, but it will be tight. The good news is that if you can keep working for just five more years, you are on track for a potentially quite comfortable retirement by full retirement age.

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

However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.

What is considered a good monthly retirement income? ›

As a result, an oft-stated rule of thumb suggests workers can base their retirement on a percentage of their current income. “Seventy to 80% of pre-retirement income is good to shoot for,” said Ben Bakkum, senior investment strategist with New York City financial firm Betterment, in an email.

What net worth is considered rich? ›

While having a net worth of about $2.2 million is seen as the benchmark for being rich in America, it's essential to remember that wealth is a subjective concept. Healthy financial habits and personal perspectives on money are crucial in defining and achieving wealth.

How long will $3000000 last in retirement? ›

As mentioned above, $3 million can easily carry you through 40 years of retirement, making leaving the workforce at 50 a plausible option. Many dream of early retirement, but if you're lucky enough to already have $3 million set aside for this phase of your life, you could do more than dream.

How many Americans retire with $1000000? ›

Only a small fraction of retirees — around 8% to 10% — have successfully saved $1 million or more.

What is the 4 percent rule in retirement? ›

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 80 percent rule for retirement? ›

The rule of thumb is that to you'll need about 80 percent of your pre-retirement income to maintain your lifestyle in retirement, although that rule requires a pretty flexible thumb.

What is the 4% rule for asset allocation? ›

The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.

What is 80 20 asset allocation in retirement? ›

Typical examples of this plan are: Put 80% of your money into retirement accounts like 401ks or IRAs, and 20% in high-yield investments. Invest 80% of your money in passive index funds or ETFs and the remaining 20% in real estate.


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