Asset Allocation in Retirement: Balancing Growth and Safety

Conventional wisdom used to be simple: subtract your age from 100, and that's how much you should have in stocks. Turn 65? Put 65% in bonds and coast safely into your golden years. Problem solved, right?

Not quite. This formula was created when life expectancies were shorter and inflation was different. Today, if you retire at 65, there's a strong chance you'll need your portfolio to support you for 25 to 35 years. That's a long time for inflation to erode purchasing power, especially when bonds barely keep pace with rising costs.

The real question isn't whether you need safety in retirement. You absolutely do. The question is: how do you protect yourself from running out of money while also protecting yourself from your money running out of purchasing power?

Let's talk about why that age-based formula has become outdated. Three major shifts have fundamentally changed retirement planning:

Longevity has increased dramatically. A 65-year-old couple today has a 50% chance that at least one spouse will live past 90. That means your portfolio needs to last three decades or more. What feels safe at 65 might leave you financially vulnerable at 85.

Interest rates have been historically low. While rates have risen recently, the era of reliably earning 5-7% on safe bonds is largely behind us. A portfolio of only bonds and cash struggles to outpace inflation over time, which averaged 3.3% annually from 2000 to 2023.

Healthcare costs keep rising faster than general inflation. Fidelity estimates that a 65-year-old couple retiring in 2024 will need approximately $315,000 to cover healthcare expenses throughout retirement. Medicare helps, but it doesn't cover everything, and premiums increase each year.

Here's the uncomfortable truth: being too conservative can be just as risky as being too aggressive. If your portfolio can't keep up with inflation, you're losing purchasing power every year. That's a slow-motion crisis that's easy to ignore until it's too late.

So if the old formula doesn't work, what does? Many financial professionals now recommend a bucket strategy that segments your money based on when you'll need it. Think of it as organizing your portfolio into different time zones.

Bucket 1: Immediate Needs (0-2 years)
This is your safety net: cash, money market funds, and short-term bonds. You want 1-2 years of living expenses here that aren't covered by Social Security or pensions. This bucket protects you from having to sell stocks during a market downturn.

• High-yield savings accounts (currently 4-5% at many online banks)
• Money market funds
• Short-term Treasury bills
• CDs laddered over 12-24 months

Bucket 2: Medium-Term Needs (3-10 years)
This is your balanced zone: a mix of bonds, dividend-paying stocks, and balanced funds. You're looking for moderate growth with less volatility than pure stocks. This bucket refills Bucket 1 periodically.

• Intermediate-term bond funds
• Dividend aristocrats (companies that have increased dividends for 25+ years)
• Balanced funds (typically 60% stocks, 40% bonds)
• TIPS (Treasury Inflation-Protected Securities) for inflation hedge

Bucket 3: Long-Term Growth (10+ years)
This is your growth engine: primarily stocks and stock funds. Yes, even in retirement. You won't touch this money for a decade or more, which gives it time to weather market volatility and grow. This bucket eventually refills Bucket 2.

• Low-cost index funds (S&P 500, total stock market)
• International stocks for diversification
• Growth-oriented mutual funds
• Real estate investment trusts (REITs) for inflation protection

This is where it gets personal. There's no magic formula because your situation is unique. However, research from firms like Vanguard and T. Rowe Price suggests most retirees benefit from maintaining 40-60% stock exposure throughout retirement.

Here's how to think through your own allocation:

Start with your guaranteed income. Add up your Social Security (you can get estimates at ssa.gov) and any pension income. If these cover 80% or more of your essential expenses, you can likely afford more stock exposure because you're not dependent on your portfolio for day-to-day living.

Consider your time horizon. Planning to leave a legacy? That money has a very long time horizon (potentially outliving you by decades). It can handle more stock exposure. Need to fund long-term care in 5-10 years? That money needs more stability.

Factor in your flexibility. Can you reduce spending if the market tanks? Do you have a part-time income option? Flexibility is a superpower in retirement, it lets you take more calculated risks with your investments.

Be honest about your risk tolerance. The best allocation is one you can stick with. If a 60% stock allocation keeps you up at night during market drops, it's too aggressive, regardless of what the models say. You need to sleep well and preserve purchasing power.

Asset allocation isn't just about what you own but also where you hold it. The tax treatment of your accounts matters enormously in retirement.

Traditional IRAs and 401(k)s: These are your tax-deferred accounts. Every withdrawal is taxed as ordinary income, which can be as high as 37% federally. Remember, you'll face Required Minimum Distributions (RMDs) starting at age 73, whether you need the money or not. Strategy: Hold bonds and other income-generating assets here. Since you'll pay ordinary income tax anyway, you might as well capture the higher yields bonds sometimes offer.

Roth IRAs: These are your tax-free goldmine. Withdrawals (including growth) are completely tax-free in retirement, and there are no RMDs during your lifetime. Strategy: This is prime real estate for your highest-growth stocks. Let them compound tax-free for as long as possible. Many retirees tap other accounts first and save Roth assets for later in retirement or to pass to heirs.

Taxable brokerage accounts: You'll pay taxes on dividends and capital gains, but you get the favorable long-term capital gains rates (0%, 15%, or 20% depending on income) instead of ordinary income rates. Strategy: Hold tax-efficient investments like index funds and municipal bonds here. You can also harvest tax losses to offset gains, something you can't do in retirement accounts.

One powerful move: if you retire before 65 and before Social Security starts, consider Roth conversions during these low-income years. You'll pay tax on the conversion, but potentially at a lower rate than you would later when RMDs and Social Security kick in.

Setting your allocation is step one. Maintaining it through market ups and downs is where the real work happens. Rebalancing is the unglamorous discipline that keeps your portfolio on track.

Here's what happens without rebalancing: imagine you start retirement with a 50/50 stock-bond split. The stock market has a great three-year run, and suddenly you're at 65/35. You've accidentally taken on more risk right when you might not want it. Then the market corrects, and that higher stock allocation amplifies your losses.

Rebalancing forces you to sell high and buy low, the opposite of what our emotions tell us to do. When stocks soar, you sell some and buy bonds. When stocks tank, you do the reverse.

How often should you rebalance? Most experts recommend one of two approaches:

• Calendar-based: Rebalance annually or semi-annually. Simple and prevents over-trading.
• Threshold-based: Rebalance when any asset class drifts 5% or more from its target. More responsive but requires monitoring.

In retirement accounts (IRA, 401(k)), rebalancing triggers no taxes, so do it as needed. In taxable accounts, be mindful of tax implications. You might rebalance by directing new contributions or dividends rather than selling appreciated assets.

Going too conservative too quickly. The biggest risk isn't market volatility, it's outliving your money. A portfolio of only bonds and CDs might feel safe, but inflation is the silent thief that will slowly erode your lifestyle.

Chasing yield in the wrong places. When bonds pay little, it's tempting to reach for higher yields in risky bonds, dividend stocks, or complex products. Remember: if it sounds too good to be true, it probably is. Stick with quality.

Forgetting about inflation. Just because you're retired doesn't mean prices stop rising. TIPS, real estate, and stocks all offer some inflation protection. Pure cash and nominal bonds don't.

Panic selling during downturns. This is where the bucket strategy shines. Knowing you have 1-2 years of expenses in cash helps you avoid selling stocks at the worst possible time. Market downturns are temporary; poor selling decisions can permanently damage your retirement.

Ignoring sequence-of-returns risk. This is the danger of poor market returns in your early retirement years. If you retire into a bear market and start withdrawing money, you're selling low and depleting your portfolio faster. This is another reason to keep that cash bucket funded.

Your allocation at 65 shouldn't necessarily be the same at 75 or 85. As you move through retirement, your needs and circumstances change.

Early retirement (60-70): This is when sequence-of-returns risk is highest. Many experts suggest being slightly more conservative here, perhaps 50-60% stocks, to protect against early market shocks.

Mid-retirement (70-80): If you've made it through the first decade successfully and your portfolio is on track, you might actually increase stock exposure slightly. Your spending rate typically decreases (the "go-go" years slow to "slow-go" years), and you have more clarity on your longevity and legacy goals.

Late retirement (80+): This depends entirely on your situation. If your portfolio has grown and exceeds your needs, you might shift more conservative to protect your legacy. If you're spending down assets as planned, maintaining growth exposure helps the remaining portfolio last.

Asset allocation in retirement isn't a set-it-and-forget-it decision. It's an ongoing balance between safety and growth, between protecting what you have and ensuring it lasts.

Start by calculating your guaranteed income from Social Security and any pensions. This is your foundation. Then assess how much of your remaining expenses need to come from your portfolio. That withdrawal rate, combined with your time horizon and risk tolerance, will guide your allocation.

Consider working with a fee-only financial advisor, especially as you transition into retirement. The first few years are critical, and professional guidance can help you avoid costly mistakes. Look for advisors who are fiduciaries (legally required to act in your best interest) and who charge transparent fees rather than commissions.

Most importantly, remember this: the goal isn't to have the perfect allocation. The goal is to have an allocation you understand, that matches your needs, and that you can stick with through market ups and downs. Consistency and discipline matter more than perfection.

Disclaimer: This article provides educational information only and does not constitute financial advice. fidser. is not a certified financial planning service. Always consult with a qualified financial advisor or planner before making investment decisions or changes to your retirement portfolio. Your individual circumstances, including tax situation, risk tolerance, and financial goals, require personalized professional guidance.