As you transition into retirement, many aspects of life change – your routines, activities and even spending habits. Your investment strategy should probably change, too.
The asset allocation that helped you reach retirement may not be the one that best supports you in retirement.
At Advance Capital Management, we take a personalized approach to investing, helping clients build and manage portfolios that balance the goals of maximizing returns and mitigating risk based on their individual needs. We know that not everyone needs the same investment recipe. What works for one retiree may not work for another. That’s why we tailor strategies to align with your unique financial situation, risk tolerance and long-term needs.
So, what is the right asset allocation for you?
Key Takeaways:
- Balance risk and reward – too conservative, and your portfolio may not keep up with inflation; too aggressive, and market downturns could hurt.
- Adjust over time to align with changing income needs, inflation and market conditions.
- Social Security should fit into your overall strategy – don’t claim without a plan.
Choosing an appropriate asset allocation in retirement
Asset allocation in retirement is both an art and a science. It’s about balancing growth, income and stability so that your savings last as long as you do. In fact, asset allocation is one of the most significant factors influencing your investment outcomes.
Unlike during your working years – when the goal was to grow your wealth – your retirement portfolio now has to sustain you through market fluctuations, inflation and unexpected expenses. A well-diversified portfolio helps you navigate shifts in the economy or markets, providing the opportunity to capture gains while reducing the risk of overconcentration in any one asset class.
Many investors don’t realize just how critical asset allocation is. A Prudential Investments survey found that 42% of investors don’t even know how their assets are allocated.
If you’re unsure about your mix of stocks, bonds and cash, now is the time to take a closer look.
Striking the right balance: risk, reward and income
Retirement doesn’t mean avoiding risk altogether – it means managing it wisely. Generally, a properly diversified portfolio will hold portions of the three most common assets:
- Stocks: Essential for long-term growth but come with market volatility.
- Bonds: Provide stability and income but can struggle to keep up with inflation.
- Cash: Ensures liquidity for immediate expenses but offers little return.
A common guideline is the Rule of 110: Subtract your age from 110 to determine the percentage of your portfolio that should be in stocks. So, if you’re 70 years old, a 40% stock and 60% bond/cash mix may be appropriate.
But one-size-fits-all rules don’t always work – your health, risk tolerance and income needs should also guide your decision.
Learn more about portfolio diversification here.
A quick but important note on inflation
Inflation is the silent killer of retirement plans. Even at just 3% annually, prices double in 24 years. If your portfolio is too conservative, your money may lose purchasing power. Keeping some exposure to stocks and other growth assets can help offset inflation’s impact.
Adjusting asset allocation as you age
Typically, your portfolio should evolve as your retirement progresses. Here’s how you might adjust your portfolio at key milestones:
- Early retirement (60s): Maintain a healthy balance of growth and stability. A mix of stocks and bonds can help generate income while keeping up with inflation.
- Mid-retirement (70s): Reduce equity exposure slightly but keep enough stocks to ensure your money continues to grow.
- Late retirement (80s+): Prioritize stability and income while ensuring enough liquidity to cover unexpected costs.
Many retirees make the mistake of getting too conservative too soon, which can lead to their savings losing purchasing power to inflation. With life expectancies increasing, your portfolio needs to last 30 years or more. Therefore, growth – that is, owning stocks – is still important!
Take a deeper dive into how age plays a role in shifting your asset allocation by reading this article.
Social Security: know your timing
Social Security plays a crucial role in your overall asset allocation strategy because it provides a stable, guaranteed income source that can reduce the need to draw from your investment portfolio. The more you can rely on Social Security, the less pressure there is on your savings, allowing you to take a more balanced or growth-oriented approach with your assets.
When to claim Social Security is one of the most important retirement decisions you’ll make. Claiming early at 62 locks in a permanently lower benefit, while delaying until 70 can increase your monthly check by up to 32%.
However, the right age to claim depends on how Social Security fits into your overall retirement plan.
Consider:
- Your other income sources: Will delaying Social Security allow your investments to grow longer, reducing the need for early withdrawals from your portfolio?
- Your health and longevity: If you expect a long retirement, delaying benefits could provide greater financial security later in life.
- Your spouse’s benefits: Coordinating Social Security claiming strategies can help maximize household income and reduce reliance on investment withdrawals.
The bottom line
Hopefully, this article shows you that asset allocation in retirement isn’t a one-time decision – it’s an ongoing process that should evolve as your retirement lifestyle, income needs and financial markets change.
Just as retirement brings new experiences and priorities, your investment strategy should adapt to support those changes while keeping your money working for you. Staying on top of your asset allocation, rebalancing periodically and adjusting as needed can help ensure your savings last throughout retirement.
Navigating these decisions can be complex, and working with a financial adviser can help you create a strategy tailored to your needs. Contact us today for a free financial consultation – and let’s build a retirement plan that works for you.
