This Old-School Retirement Rule No Longer Applies

Modern-day asset allocation is a lot trickier than the traditional rule of thumb that so many people go by.

Asset allocation is one of the biggest portfolio-planning decisions an investor will make, especially in or near retirement.

And yet, I run into people all the time who want to base their stock-and-bond split on age-based rules of thumb that no longer make sense.

The “100 minus your age” guideline for determining your stock/bond ratio, for example, is so far past its prime, it should be retired. But we still have people come into our office who’ve heard it and believe it’s the way to go. “I’m 65,” they say, “so only 35% of my money should be in equities, and the rest should be in bonds.”

The problem is that rule is based on a different time, when people didn’t live as long and didn’t need to pull as much income from their investments.

Of course, there’s never really been a one-size-fits-all strategy for asset allocation. But today’s financial environment is trickier than it was even a decade ago, when savers could count on traditional “safe” sources, such as certificates of deposit and bonds, for more of their income.

Back then, you would have found CDs that paid 4% or 5%. Today, you’d be lucky to get one that pays 1%.

That means many retirees have had to make some modern-day adjustments to their mix — taking on more risk than they might have been comfortable with 10 years ago — because they need to earn more. If you’re playing it too safe, there’s a good chance you’ll run out of money. You’re simply not going to be able to keep up with the amount you’re withdrawing.

So, what should you be looking at when deciding your asset allocation? Much of the decision depends on your time horizon, your income needs and your feelings about risk. Here are some factors you should consider and discuss with your financial adviser:

  1. Are you currently drawing income from your portfolio? Depending on where you are on your retirement timeline, if you’re pulling money out of your accounts and the market takes a downward turn, it can be devastating. So, you must balance that concern with your need for growth.
  2. If you aren’t currently drawing from the portfolio, will you need to draw from it in the future?
  3. If you are withdrawing income, what is the withdrawal rate that you’re taking out of the portfolio?
  4. How do you feel about risk emotionally? Will you be comfortable with a portfolio that’s heavier in equities than you originally planned?
  5. Can you deal with risk financially? How much are you willing to lose?

Finding your “happy place” between risk and growth is not an easy thing.

Some retirees are fine with a stock-heavy mix. They’re planning for the likelihood that they’ll be around for a few more decades, and the idea of outliving their money is what truly worries them. Others have the freedom to be more aggressive because they can live comfortably on their Social Security and pension. Still others find they feel better with a more conventional 60-40 split, or some variation close to it.

There’s no one equation that can tell you what’s best for your financial future — no set percentage that’s going to make everything all right. So, if you’re still planning using old-school rules, it’s time to go back to the drawing board.

Kim Franke-Folstad contributed to this article.

About the Author

Jason Mengel, CFP

Co-Founder, Fusion Capital

Jason Mengel, originally from Atlanta, Ga., currently resides in Isle of Palms, S.C. He holds a CERTIFIED FINANCIAL PLANNER™ designation and is a member of the Financial Planning Association. Mengel graduated from Wofford College in Spartanburg, S.C., with a B.A. in Finance.

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