Apr 2, 2025
Many people spend years contributing to their retirement savings in the hopes of building a sizable nest egg for later in life. You may have worked hard to grow your retirement account balance, too.
If you're planning to retire next year, now is a good time to review your portfolio and ensure your assets are appropriately allocated for your age. But what does that mean in practical terms?
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Your portfolio likely includes a mix of stocks (equities) and bonds (fixed income), and you may be wondering what the right balance is. Here's how to figure out the optimal mix.
The benefits of stocks vs. bonds in retirement
Having both stocks and bonds in your retirement portfolio offers distinct advantages. While stocks carry more risk, they also tend to deliver stronger returns.
The average return rate for stocks is 7% to 10%, whereas bonds have typically returned 3% to 5%.
Maintaining stocks in your portfolio is important because you want your money to continue growing during retirement. However, bonds play a role in protecting a portion of your assets from stock market volatility.
Unlike stocks, bond values don’t fluctuate wildly, providing stability — a necessity when you’re living off your investments. Bonds also offer to generate fixed income since they’re contractually obligated to pay interest.
Stocks can provide income as well if you invest in dividend-paying companies. However, unlike bonds, companies' stocks are not required to pay dividends, and even those with a solid history of doing so may opt to cut or eliminate those payments as they see fit.
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How to build the right investment mix
How you allocate your assets before retirement may not be the same strategy you use during retirement — and for good reason.
While you're working, you have time to ride out stock market downturns because you won’t need to withdraw that money for many years. However, once you're retired, you may need to tap into your portfolio regularly for income, requiring a more cautious investment approach.
For this reason, it's a good idea to keep the bulk of your portfolio in stocks during your wealth accumulation years. But as you transition into retirement, shifting a greater percentage into bonds can help manage risk and provide stability.
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Your specific allocation will depend on factors like life expectancy, risk tolerance and income needs. Some retirees prefer a 50/50 split between stocks and bonds, while others opt for a 40/60 split in either direction.
A common guideline is the rule of 110, which suggests subtracting your age from 110 to determine the percentage of your portfolio that should be in stocks.
- At age 40, this rule suggests keeping 70% of your assets in stocks
- At age 65, a 45% stock allocation may be more appropriate
Another popular strategy is the bucket strategy, which divides your portfolio based on different time horizons:
- Short-term bucket: Holds conservative investments like bonds for near-term expenses
- Medium-term bucket: Includes a mix of stocks and bonds
- Long-term bucket: Primarily stocks for long-term growth
It’s also important to maintain a cash reserve. Rather than allocating a fixed percentage to cash, a good rule of thumb is to keep enough to cover one to two years of living expenses. This allows you to avoid selling investments during a market downturn.
Finally, your retirement portfolio doesn’t have to be limited to stocks and bonds. Depending on your income goals and risk tolerance, you might consider diversifying with real estate, such as a rental property.
Consulting a financial adviser can help you develop a strategy that balances risk and reward — ensuring your portfolio meets your retirement needs.
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Maurie Backman is a freelance contributor to Moneywise, who has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate.
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