How much of your retirement savings should be in stocks?

Financial consultants are now advising people even in retirement to have a portion of their savings in stocks. For a retirement that may last 20 to 30 years or more, for most people only exposure to stocks can provide the growth needed to help ensure your savings don’t run out prematurely.

Of course this doesn’t apply to you if your nest egg is already exceptionally large. In that case, your main concern is keeping an eye on your expenditures. The rest of us, though, are faced with a question: how much should you have in stocks? While there’s no one answer that applies to everyone, here are some tips for deciding what’s right for your situation.

Investors who are in or close to retirement typically take one of three approaches.

The first is a “static” allocation: you decide on a mix of stocks and bonds, such as 60% stocks-40% bonds or 40% stocks-60% bonds, depending on your time horizon and tolerance for risk. You then rebalance your portfolio every year or so, buying and selling stocks and bonds as needed to maintain the right percentages.

A second approach is to start more aggressively, then become more conservative in later years.  For example, you start your retirement with 50% stocks and 50% bonds, then gradually switch to 30% stocks and 70% fixed income investments in your 70s. This is known as the “glide path” approach, since you “glide down” your exposure to equities as your retirement proceeds.

The third approach has become popular based on research by financial advisor Michael Kitces and professor of retirement income Wade Pfau. In this approach you lower your investment in stocks early in retirement, and then increase it later. For example, you might start retirement with 30% in stocks, and then gradually raise it later to 50%. The theory is that you should be conservative when your retirement begins, since a market decline at that time will severely affect you. But increasing your stock exposure later will increase the chances that your savings will last throughout your retirement, the research found.

Any of these approaches may be appropriate for you and your situation. But whichever one you choose, you need to have the mindset to stick with it. If your exposure to stocks is higher than you’re really comfortable with, you might not be able to stay the course during a severe market downturn. Conversely, you might be tempted to ramp up your stock holdings after the market has risen, leaving you more vulnerable to a sudden decline.

A haphazard approach is much worse than a systematic strategy. Before choosing a strategy, you’ll want to decide what stock-bond allocation you’re comfortable with. An online tool such as CalcXML will help you determine your attitudes and tolerance toward market risk and choose the right allocation.

Next, you’ll want to use a simulation tool to project how your savings might hold up to future scenarios. A retirement calculator like Vanguard’s uses Monte Carlo simulations to estimate the probability that your savings will support your desired retirement lifestyle. You enter a few numbers like the amount of your savings and your asset allocation, and the calculator runs simulations with a various economic scenarios to tell you the probability your savings might last for the duration of your retirement. If your chances are lower than you’d like, you might consider adjusting your asset mix, or increasing your savings rate.

If you expect to have other funds or sources of income such as a pension, annuity, retirement income fund, or inheritance, you may be able to increase your stock exposure, since you have a cushion to cover some of your expenses. An annuity, especially a delayed annuity, does reduce the amount of your savings, but it gives you a guaranteed source of retirement income that’s higher than you might otherwise get.

On the other hand, if your savings are relatively small, you may want to take a more conservative investment strategy to preserve your funds, and possibly look into part-time employment or other supplemental income sources.

In the end, the various allocation formulas that are proposed by financial advisors and websites are just starting points. You’ll want to pick one and then adjust it based on your financial situation and risk tolerance. And you’ll revisit it periodically during retirement as your time frame and risk tolerance change. But you’ll likely want to keep some exposure to stocks in retirement to maximize the chance that your savings will last your entire retired life.

Finally, don’t forget that there are different types of stocks and stock mutual funds, such as large-cap, small-cap, growth, value, and index funds, and different types of bonds as well, including corporate, Treasury, and high-yield. There are also other classes of investments available to you like CDs, real estate, and precious metals.


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