Any retirement asset allocation tips?

Cletch69

Cletch69

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I’m 65 years old and about to retire.

For my retirement portfolio, I plan to invest in a global stock index and a global bond index:

The challenge is that there’s no perfect asset allocation, and I’m struggling to decide what’s right for me.

Some people suggest formulas like "120 minus your age," for example:

  • 120 - 65 years = 55% stocks, 45% bonds
  • 120 - 70 years = 50% stocks, 50% bonds
  • 120 - 80 years = 40% stocks, 60% bonds
  • 120 - 90 years = 30% stocks, 70% bonds
Others recommend sticking with a fixed allocation, like 60% stocks/40% bonds or 50%/50%, for the rest of your life.

What’s your asset allocation in retirement, and why did you choose it?
How should I decide the best allocation for my portfolio?
 
How much of your portfolio will you need to spend on essentials during retirement? If your basic expenses are fully covered by an inflation-adjusted pension, you can afford to take more risks and hold more stocks in your portfolio, if that’s your preference. On the other hand, if your portfolio has to provide every euro for necessities like food and housing, you’ll have less capacity for risk and likely need a higher allocation to bonds. Most people fall somewhere between these extremes. Similarly, you should also consider how much you want to spend from your portfolio to enjoy your retirement.

What works for my portfolio doesn’t necessarily apply to yours because it’s tailored to my own risk tolerance and the stability of my income sources for essential expenses. You need to think about the security of your income for covering essentials, how much risk you’re comfortable with during market fluctuations, your ability to reduce spending during downturns, and how much you plan to withdraw from your portfolio compared to its size. These answers have to reflect your specific circumstances, not anyone else’s.

It’s definitely not easy to figure out your risk tolerance for retirement. I believe most people have a lower capacity for risk once they start relying, even partially, on their portfolio to live. But many don’t fully understand how their tolerance has shifted until they experience their first bear market in retirement—when stocks are plunging, and for the first time, there’s no paycheck to fall back on. I know I was nervous during my first bear market in retirement, wondering if I had set the portfolio’s risk level correctly.

Once you decide on a risk level you’re comfortable with, you might consider dialing it down just a bit further until you’ve weathered a market downturn and seen how you handle it emotionally. You’ll always have the opportunity to increase risk later if you feel it’s right. Best wishes!
 
Cletch69 said:
What’s your asset allocation in retirement, and why did you choose it?
Click to expand...
I decided to allocate enough fixed-income investments, like bonds, to cover the rest of my life. As a result, my current asset allocation is about 60% stocks and 40% bonds.

I keep things simple with a self-managed, low-cost, tax-efficient portfolio that’s essentially based on a three-fund strategy. My portfolio is primarily held at Schwab, and no individual fund or ETF has an expense ratio higher than 0.07%.

Here’s how my accounts are set up:

  • Taxable Brokerage Account (Schwab): 100% in VTI (Vanguard Total Stock Market ETF).
  • Roth IRA (Schwab): 100% in SCHB (Schwab US Broad Market ETF).
  • Traditional IRA (Schwab) (rolled over from a 401k): 13% in SCHF (Schwab International Index ETF) and 87% in bonds (a mix of TIPS, BND, and SGOV).
  • HSA (Optum Bank): 100% in VITSX (Vanguard Total Stock Market Index Fund).
  • Checking Account (at a large national bank): Just enough to cover monthly expenses.
That’s the basic summary!
 
Honestly, what others are doing doesn’t really matter. Your asset allocation should be based on your own situation—especially your risk tolerance and how much you’ve saved compared to your expected expenses. People’s strategies can range widely, from being all-in on stocks to something like 20% stocks and 80% bonds. I even know someone who’s retired and keeps their entire portfolio in bonds.
 
I don’t really believe in age-based allocation. Your individual circumstances and preferences should be the main factors in your decision. It’s very unlikely that my situation and preferences are the same as yours.
 
None of the numbers you mentioned seem unreasonable. I’d recommend not going below around 30% in stocks to help protect against inflation.

Assuming you have enough savings for retirement, how you invest now really depends on how you feel about your money moving up and down with the market. By this point, you should have a good sense of that.

If you're unsure, I’d suggest starting with something like 45% stocks (which is in the middle of your list) for a few years, then reassessing. There’s no need to stick to a set plan of increasing bonds over time, but some people do prefer that approach.
 
  • 40% in equities: 75% in the total U.S. market, 25% in international
  • 60% in fixed income: 25 times expenses split between CDs, treasuries, and TIPS, with the remainder in BND
I like Bill Bernstein’s idea: if you've already "won the game," why keep playing? Ignoring inflation, 25 times expenses should cover me until about age 92 and allows me to sleep easy during market downturns. The equity portion should help with inflation.

I also believe research suggests there’s not much difference between a 60-40 or 40-60 asset allocation.
 
I’ve actually done this myself—I'm 77 and retired for over 20 years. A 70/30 to 30/70 allocation will work well for you. The key is to pick a level of volatility you can handle and stick with it.

I retired with a 30/70 portfolio, and now it’s at 33/62/5, with the 5 being cash for two years of living expenses. An investor with more equity in their allocation will likely end up with a larger portfolio, but they’ll be taking on more risk.
 
One thing I noticed is that you have a USD equity fund and a EUR bond fund.

If your home currency is EUR (which it seems like it is), is there a version of that equity fund available in EUR?

This could help you avoid foreign exchange fees when you sell fund units to cover living expenses. Since the units are accumulating, it shouldn't be an issue with reinvested dividends.

When it comes to retirement, I wouldn't go over 50% in equities. However, I would likely keep that allocation for quite a while, possibly well into my 70s.
 
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