Structuring Your Retirement Portfolio

According to the Social Security Administration, the average 65-year-old retiree can expect to live roughly 18–20½ years after leaving the workforce.1 However, with advances in health care leading to increasing longevity, it’s widely recommended that you plan for a retirement of 30 years or longer. Therefore, how you invest your savings in retirement is crucial.

The first aspect of our three-pronged approach to generating retirement income is creating a plan. After you’ve completed the planning stage, your next step should be to determine your portfolio allocation. Lastly, you’ll make a plan for withdrawing from your portfolio in retirement.

The portfolio allocation step is all about choosing the right mix of investments. Here’s a guide for how to approach it.

The key is staying invested—and that means having at least part of your portfolio allocated to stocks, but in the right balance with other investments.

1. Set aside one year of cash

Try to set aside enough cash—minus any regular income from rental properties, annuities, pensions, Social Security, investment income, etc.—to cover a year’s worth of retirement expenses. Ideally, this money would be held in a relatively safe, liquid account, such as an interest-bearing bank account, money market fund or short-term certificate of deposit (CD). 

With this cash on hand, you won’t have to worry as much about the markets or a monthly paycheck. Spend from this account and replenish it periodically with funds from your invested portfolio. Then invest the rest of your portfolio sensibly.

2. Create a short-term reserve

Within your main portfolio, starting with accounts that you may need to tap soon, create a short-term reserve to cover withdrawals from your portfolio and help weather a prolonged market downturn—we recommend two to four years’ worth of living expenses, if you can. This short-term reserve will help prevent you from having to sell more volatile investments, like stocks, in a down market.

This money can be invested in high-quality, short-term fixed income investments, such as short-term bonds or bond funds. Or, if you’d rather manage individual investments, you might want to create a short-term CD or bond ladder—a strategy in which you invest in CDs or bonds with staggered maturity dates so that the proceeds can be collected at regular intervals. When the CDs or bonds mature, you can use the money to replenish your bank account.

3. Invest the rest of your portfolio

When it comes to your main portfolio, remember that your overarching goal is to create a mix of investments that work together to preserve capital, generate income and grow. Your specific mix of stock, bond and cash investments should be appropriate for your age, income needs, financial goals, time horizon and comfort with risk.

With a year’s worth of cash on hand and a short-term reserve in place, invest the remainder of your portfolio in investments that align with your goals and risk tolerance. For example, it’s perfectly acceptable to focus on growth in the early years of retirement in order to take advantage of potential compounding and boost your savings over time. As you move through retirement, you may want to shift to a more conservative investing approach that seeks to preserve capital and generate income. 

What to do if you have an annuity

Many retirees use annuities to provide a steady paycheck that they won’t outlive, and to help protect part of their portfolios from market risk. If you have predictable income from any type of annuity, you may be comfortable reducing the balance in your cash account and short-term reserve, as well as investing the rest of your portfolio in stocks and bonds for growth potential.

Annuity guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.

Adapt your strategy over time

Here’s an example of how you might adjust your asset allocation throughout retirement, if you plan to use your portfolio including principal to support spending, rather than spending only your investment earnings and leaving your nest egg to your heirs.

During your early years of retirement (age 60-69), consider a moderate asset allocation consisting of 60% stocks, 35% bonds and 5% cash and cash-like investments. From age 70-79, consider shifting to a moderately conservative allocation of 40% stocks, 50% bonds and 10% cash and cash-like investments. At age 80 and older, consider shifting to a conservative allocation of 20% stocks, 50% bonds and 30% cash and cash-like investments.

Retirees who adopted this plan would have seen the following results in their portfolios*:

Hypothetical portfolios, 1970 through 2016: A moderate portfolio would have gained 31% in its best year and lost 21% in its worst year. Its average annual return would have been 9%. A moderately conservative portfolio would have gained 27% in its best year and lost 13% in its worst year. Its average annual return would have been 9%. A conservative portfolio would have gained 23% in its best year and lost 5% in its worst year. Its average annual return would have been 8%.

*Based on data collected from 1970 through 2016.

Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The return figures represent the best and worst total returns, as well as the compound average annual total returns, for the hypothetical asset allocation plans. The asset allocation plans are weighted averages of the performance of the indexes used to represent each asset class in the plans and are rebalanced annually. Returns include reinvestment of dividends and interest. The indexes representing each asset class are S&P 500® Index (large-cap stocks), Russell 2000® Index (small-cap stocks), MSCI EAFE® Net of Taxes (international stocks), Barclays U.S. Aggregate Bond Index (bonds) and Citigroup U.S. 3-month Treasury bills (cash investments). The conservative allocation is composed of 15% large-cap stocks, 5% international stocks, 50% bonds and 30% cash investments. The moderately conservative allocation is 25% large-cap stocks, 5% small-cap stocks, 10% international stocks, 50% bonds and 10% cash investments. The moderate allocation is 35% large-cap stocks, 10% small-cap stocks, 15% international stocks, 35% bonds and 5% cash investments. CRSP 6-8 was used for small-cap stocks prior to 1979, and Ibbotson U.S. 30-day Treasury Bill Index was used for cash investments prior to 1978.

The key is staying invested—and that means having at least part of your portfolio allocated to stocks, but in the right balance with other investments. Why? Over time, equities historically have been an adequate defense against inflation and taxes—even better than bonds and cash.2 However, as you get older, limit your exposure to stocks because there will be less time to recover from a bad year in the market.

1. Social Security Administration, Actuarial Life Table, 2014. The average life expectancy for a person age 65 is 17.84 years for males and 20.44 years for females.
2. Schwab Center for Financial Research.

Next Steps

Explore additional steps for retirement planning in these related articles about planning for retirement and withdrawing from your savings in retirement. If you’d like to talk about your retirement plan, call a Schwab investment professional at 800-355-2162 or visit a branch near you.

Important Disclosures

Past performance is no guarantee of future results.

Investing involves risks, including loss of principal.

Asset allocation strategies do not ensure a profit and do not protect against losses in declining markets

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The Russell 2000 Index is a subset of the Russell 3000® Index, and includes approximately 2,000 of the smallest securities based on a combination of their market capitalization and current index membership.

The MSCI EAFE Index is a free float-adjusted market-capitalization-weighted index designed to measure the equity market performance of developed markets, excluding the United States and Canada. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.

The Barclays U.S. Aggregate Bond Index is made up of the Barclays Capital U.S. Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index, including securities that are of investment-grade quality or better, have at least one year to maturity and have an outstanding par value of at least $100 million.

CRSP 6-8 Index is a small-cap index created and maintained by the Center for Research in Security Prices (CRSP) at the University of Chicago’s Graduate School of Business.CRSP capitalization-based indexes include common stocks listed on the NYSE, AMEX and the NASDAQ National Market. The CRSP 6-8 Index refers to the 6th through the 8th deciles and represents a small-cap index that excludes micro-caps.

The Ibbotson U.S. 30-day Treasury Bill Index is an unweighted index that measures the performance of one-month maturity U.S. Treasury bills.

Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation.

Charles Schwab & Co., Inc., a licensed insurance agency, distributes certain life insurance and annuity contracts that are issued by non-affiliated insurance companies. Not all products are available in all states.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.