What is the Best Asset Allocation in Retirement? Portfolio Allocation Guidelines for Any Retiree

As you make the move from working life to retirement, a whole lot is going to change. You’ll find yourself with more free time – and without a dependable stream of income. 

That’s why perfecting your retirement portfolio allocation is so imperative. It can be the difference between making your retirement account last while living the lifestyle you’ve been waiting for and having to resort to side work and compromising on what retirement looks like for you.

So – what is the best asset allocation in retirement? 

While there will certainly be intricacies between one person to the next, there are some best practices for allocating your capital during retirement. And below, we’ll share them with you. By the end of this in-depth review of the ideal portfolio allocation in retirement, you’ll feel confident in navigating this decision for yourself.

First – what is asset allocation, exactly? 

What is Asset Allocation in Retirement?

Simply put, asset allocation in retirement is the ratio in which you distribute your money across different investment vehicles. 

As you already know, you don’t want to put all your eggs in one basket. You’ll invest in different assets to prevent exposure to volatile markets. But the ratio at which you’ll spread your retirement savings account across stocks, bonds, real estate, and cash will vary.

We’ll teach you the best retirement portfolio allocation strategy that we recommend retirees follow in just a moment. First, let’s talk about why this is so important.

Why Finding the Proper Retirement Portfolio Allocation is so Important to Achieving Your Dream Lifestyle

We said it in the outlook of this article, and we’ll say it again. The proper portfolio allocation in retirement can make or break your retirement. 

If you get this right, you’ll never stress about money. You’ll be able to live the retirement lifestyle you’ve always wanted – whatever that may be – and you’ll leave something behind for your kids or grandchildren.

But, if you don’t get your in-retirement asset allocation just right, you’ll take on undue financial stress as your account starts depleting faster than you anticipated. You’ll find that you have to either take on side work to bring in supplemental income, or you’ll have to compromise on what you want retirement to be. Neither of these is an ideal situation.

And fortunately, we can help you avoid the pitfalls of poor in-retirement asset allocation. There are sound principles that you can follow to prevent this and eliminate the stress and uncertainty you’re feeling around retirement planning once and for all.

So, What is the Best Asset Allocation in Retirement?

So, what is the best asset allocation in retirement? What ratio should you spread resources across stocks, bonds, cash, and other investment vehicles? 

First, understand that these are just best practices for the average person. If you’re looking to mitigate risk as much as possible and settle for a lower-income lifestyle, the best retirement portfolio allocation strategy for you will feature fewer stocks and more bonds. On the other hand, maybe you want to live a more lucrative lifestyle and travel the world. If so, you’ll want to allocate capital across higher-risk, higher-reward assets at a higher ratio. 

Moreover, we encourage you to read our complete guide on how to invest after retirement. This is an excellent resource on the principles behind generating income from investments once you retire. And with all that said, here’s how to set an appropriate asset allocation in retirement.

Start by Considering Your Monthly Expenses

The recommended asset allocation in retirement seeks to provide you with enough capital to live your dream retirement lifestyle. So, a key first step to figuring out what portfolio allocation in retirement is best is determining what retirement will cost you.

And this is why coming up with recommendations for how much one should save for retirement is so tricky. Your retirement lifestyle may be more affordable or more expensive than the next person’s. If you plan to sell your home and travel the world, your retirement will cost more than someone who plans to relocate to a more affordable state and spend their time on the golf course. 

With that said, a good rule of thumb is that your monthly expenses will be about 70-80% of what you earned in the workforce. If you made $5,000 a month, your expenses will likely fall somewhere around $3,500-$4,000. It’s also worth noting that you may earn income through social security or a pension to help offset your monthly expenses. If not, though, you’ll be on the hook for all your costs. 

Sit down and realistically consider what you expect to spend over the course of your retirement. While you can’t account for changes of heart down the road or emergency medical bills, getting a close estimation will prove invaluable in perfecting your portfolio allocation in retirement.

At this point, you can look at your retirement account and determine if you’re on the right track.

Then, Consider How Much You Have Saved Already

Once you know what retirement is going to cost you – minus any contributions from social security or a pension – you can take a look at your portfolio as it stands. How much do you have saved in your retirement accounts? And, how many years can it sustain you at your spending rate?

Say you retire at 65 and saved up $1 million over the course of your life. If you plan on spending around $40,000 a year, you have about 25 years worth of cash on hand. That’s not accounting for any expensive years that pop up as you age, but it’s also not accounting for any sort of extra income from your portfolio. With the best retirement portfolio allocation, you’ll continue to earn returns that support your lifestyle. 

All of this is to say that if it doesn’t look like you have enough cash on hand for your retirement lifestyle, you have two choices at this point:

1. Allocate assets in a more aggressive, high-risk high-reward ratio
2. Adjust your retirement lifestyle a bit to make it work

We don’t believe in compromising on your retirement after working so hard to get this far – so, we recommend you just invest more aggressively – perhaps even learning swing trading to earn supplemental income in the here and now. 

We’ll talk more about using the stock market to achieve your retirement goals later on. First, let’s explain how much cash you need to set aside.

Figure Out Cash Needs First (5-30% allocation)

There are so many different types of investments for retirement – but two that are often neglected are cash instruments or cash itself. The first allocation of your portfolio is going to be to cash. A good rule of thumb is for retirees to set aside anywhere from 1-2 years of living expenses in cash. So, using the example above of a $40k annual cost of living, you would put $40-$80k in a cash account.

Cash investments are a great choice for retirees because they’re safe – you won’t experience much volatility. Now, cash is exposed to inflation risks – which is why we encourage you to learn how to hedge against inflation in our blog.

Another important consideration as it relates to cash is what your emergency fund should be. You need to expect the unexpected when planning retirement. Your medical bills may go up as a result of age, and you’ll encounter costly problems in other areas of your life – like home repairs or your car breaking down. This is why we encourage you to be more aggressive in figuring out how much your retirement will cost to offset some of these unexpected expenses.

Moreover, some retirees – particularly those who are risk-averse – keep a separate cash account just for emergencies. This figure can range, but a general rule of thumb is that your total cash on hand should fall between 5-10% of the total retirement account balance. The one caveat is that conservative retirees over 80 years of age can hold up to 30% of the account in cash.

Next, Budget for Bonds (35-50%)

Bonds fall somewhere between cash and stocks in terms of risk and reward. While they will earn you a better return than a cash savings account, the profits are low compared to investing in the stock market. Nevertheless, a good rule of thumb is to invest up to 35-50% of your cash into high-quality bonds.

The bonds you invest capital into at the time of retirement will help you out in years 3-10 of retirement when they are mature. To get more specific about the allocation of your bonds budget, we encourage you to diversify across an even mix of short-term bonds, TIPS bonds (treasury inflation-protected securities), intermediate bonds, and equity bonds.

Now, we recommend a 35-50% portfolio allocation in retirement for this investment vehicle. Where should your specific allocation fall in this range? It will depend on your age and risk tolerance. Those who are just starting retirement need to hold higher-returning assets like stocks, so your bonds shouldn’t exceed 35%. On the other hand, those who are more conservative and older (75-80+ years of age) can justify a larger allocation in bonds of 50%.

Distribute the Rest of Your Portfolio into Stocks (20-60%)

To keep things simple, we recommend putting the remainder of your portfolio at this point into stocks. Depending on how you allocated your cash and bonds, you should be left with somewhere between 20-60% of your portfolio. And as we’ve mentioned throughout this guide, the figure you land on for your specific portfolio will be dictated by your needs, age, and risk tolerance. 

A new retiree has a long time to preserve their capital – so, they need higher returns. Early on you may have up to 60% of your portfolio in the stock market. But as you age, the need for high returns will start to fall lower – at least, if you did a good job planning! Between ages 70-80 you can drop from 60% stocks to as low as 40%, allocating more capital to bonds or cash. Then, as you finish off your retirement years after 80, you can move your allocations to as low as 20% stocks.

The tricky part isn’t necessarily determining how much of your retirement portfolio will be allocated to stocks – it’s determining how you’re going to pick your retirement stocks. But you don’t need to waste your time analyzing stocks or tracking technical trading indicators. There is a simpler way to build and manage your stock portfolio. In fact, it requires no experience in the stock market and takes just a few hours a month to manage. And no – you don’t need a financial advisor for this! 

We’ll let you in on this little secret shortly as we provide you with some additional tips for building or sustaining your portfolio allocation in retirement.

Additional Tips for Building or Sustaining Your Retirement Portfolio Allocation

Now, we want to provide you with a few parting tips for building or sustaining your portfolio allocation in retirement before wrapping things up.

Take These Recommendations With a Grain of Salt & Adjust Over Time

Finding the best asset allocation in retirement is as simple as figuring out what your annual cost of retirement will be and fine-tuning the mix of cash, bonds, and stocks you place your cash into.  But, it’s important to note that this is something that will change over the course of your retirement. 

At first, you’ll invest heavier into stocks with less cash and bonds. From years 70-80, you may start to cut back on stocks and invest heavier in bonds. And as you round out your life after 80 years of age, you’ll invest primarily in bonds and cash, with almost no stocks.

You should also consider your unique risk tolerance. If you are looking to avoid as much volatility as possible, the best retirement portfolio allocation for you will feature fewer risky investments (like stocks) and more safe investments (like cash instruments or bonds). Just know that this comes with a lower potential for profits, and will influence the lifestyle you are allowed to live.

Withdraw More During Positive Markets, Less During Down Markets

You are going to have to withdraw cash from your savings accounts and stock portfolio over time. This is inevitable – and it shouldn’t be something you fear. The entire point of your retirement account is to sustain you over the remainder of your life – you can’t take anything with you, after all.

However, it is best practice to withdraw more during positive markets and less during down markets. This will be the most sustainable approach to stretching your portfolio. 

Invest in Quality Tools & Resources

Many who are approaching retirement or just getting started with retirement have much uncertainty. Their first instinct is to hire professional help in the form of a financial advisor. But, is a financial advisor worth it for you? Usually, no – they are not. Their fees do not outweigh the returns they’ll get you.

The reality is that everything they do for you, you can do for yourself. All the resources and tools you need to take control of your financial future are at your fingertips thanks to the internet. And specifically for choosing the right stocks for your retirement portfolio, you need tried-and-true stock analysis software. That’s where VectorVest comes in.

Our system has outperformed the S&P 500 by 10x over 20+ years now. It can help you build a stock portfolio that unlocks your dream retirement effortlessly. You can uncover the best retirement stocks that pay high dividends through our pre-built stock screener. You don’t even have to go out and find these opportunities – the software brings them to you. Choosing the safest stocks for your portfolio is as easy as it gets – the system literally tells you what to buy and when to buy it.

You can even take your strategy on the go with a mobile stock advisory app. Want to see it in action before deciding? Your free stock analysis is here waiting for you…

Final Thoughts on the Best Asset Allocation in Retirement

There you have it – our guide to choosing the best asset allocation in retirement. We hope this article helps you build the best retirement portfolio allocation. Take your financial future into your own hands today and make your retirement vision a reality – it’s never been this easy, thanks to VectorVest!

If you want more retirement planning advice, explore our blog. You can learn more about the best retirement strategies by age – we have a complete guide on the subject. We also encourage you to read our article addressing the advantage of investing early for retirement if you haven’t started preparing for your future just yet.