Retirement Portfolio Assets: Allocation by Age
Key takeaways
- Asset allocation by age generally assumes that younger investors can accept more risk than older investors, but your individual situation, behaviors, comfort level, and investment goals should also guide your approach.
- As you build your investment portfolio, think about your time horizon, financial goals, investment strategy, and current income sources.
- Your ideal mix of assets like stocks, bonds, and cash can shift depending on whether you are an aggressive, moderate, or conservative investor.
- Reviewing and realigning your portfolio whenever you experience significant life events and milestones, such as a career change or growing your family, can help ensure your investments continue to support your future.
Don't put all your eggs in one basket is a classic adage when it comes to investing and financial planning. Whether you're just starting your investing journey, enjoying retirement, or at any point in between, having the right mix of investments (known as "asset allocation") can help you weather the market's ups and downs and pursue your goals.
But how many baskets should you have, and how many eggs should be in each basket? In other words, how do you determine the appropriate asset allocation?
How to evaluate your asset allocation
As you think about your investments, consider the following factors:
- Time horizon. When do you plan to use the money in your portfolio?
- Financial goals. What are you investing for (first home, children's education, retirement)?
- Investment objective. Are you looking more for growth or income?
- Risk tolerance. Will market fluctuations stress you out? How do you handle market downturns?
- Current and future income sources. Are you working or retired?
The answers to these questions can help you decide whether you're an aggressive, moderate, or conservative investor. This risk profile can influence your mix of stocks, bonds, cash, and other asset classes in your portfolio.
A common asset allocation strategy assesses your investment options by age, under the assumption that the younger you are, the more aggressive you should be with your retirement portfolio. Of course, everyone has different individual needs and behaviors. Some investors are naturally more conservative regardless of age, while others defy conventions. For example, older investors focused on passing their wealth to their heirs rather than on using it for retirement goals could be more aggressive than their peers.
Asset allocation models
| Aggressive investor | Moderate investor | Conservative investor | |
|---|---|---|---|
| Risk tolerance | High | Moderate | Low |
| Investment objective | Aggressive growth | Moderate growth | High income and some growth |
| Time horizon | 15+ years | Around 10 years | 3 – 5 years |
| Sample asset allocation | 95% stocks, 5% cash | 60% stocks, 35% bonds, 5% cash | 20% stocks, 50% bonds, 30% cash |
Staples of asset allocation
Many investors split their portfolios between stocks, bonds, and cash because it's one way to balance growth and investment risk versus income and safety. Over the long term, stocks have historically provided growth. In exchange for this growth potential, however, investors assume risk that goes well beyond that of fixed income investments like bonds and certificates of deposit.
In addition to offering diversification, bonds and similar investments are designed to provide regular income, which can help reduce the level of risk and volatility compared to stocks. Price appreciation is a secondary consideration.
Nevertheless, keep in mind that all investments involve risk, including the loss of principal.
Don't set it and forget it
Creating a diversified portfolio based on your age shouldn't be a one-and-done activity. Asset allocation is about finding the blend of investments that works for the current stage of your financial journey. For example, younger and middle-aged investors may have a higher allocation in stocks because they may have goals with longer time horizons, such as building their retirement savings, and thus have the capacity to better withstand market downturns. Retirees, on the other hand, may tend to have more in cash, bonds, and fixed income investments to help reduce risk, navigate market downturns, or generate income to help meet daily expenses.
But you don't have to allocate assets strictly by age. After a major life event occurs, such as the birth of a child or a career change, it's important to review your asset allocation to make sure it aligns with new goals and investment objectives. If it doesn't, you may want to reallocate your portfolio (shift assets around, known as "rebalancing") to help you stay on track. You may also have other goals, such as saving for a child's college education, that may have shorter time horizons.
Changing market conditions are another reason to keep an eye on your asset allocation. Market fluctuations can cause your portfolio to become more aggressive or conservative than you intended. For example, a strong stock market could shift your portfolio from 60% stocks and 40% bonds to 65% and 35%, respectively. This change is fine if you're comfortable with the new weighting and it meets your needs. Otherwise, you may want to rebalance your portfolio so it reflects your target allocation.
Time well spent
With so many things competing for your attention, it's easy to put off reviewing your investments. But Schwab has tools and resources to help you review your portfolio. Log in to your Schwab account to get started.
A portfolio asset allocation that fits your goals, time horizon, and—if appropriate—age is key to your financial well-being now and in the future.
Asset allocation FAQ
Do I need to base my asset allocation strictly on my age?
Age is a good starting point, providing you with a rough time frame, but your unique needs, personal risk tolerance, long-term goals, and major life events are also important in shaping a strategy.
How should my portfolio shift as I get closer to retirement?
Generally, as many investors near retirement, they tend to transition from an aggressive, stock-heavy portfolio toward a more conservative mix of cash and bonds. This approach can help reduce risk and generate retirement income.
How does a reallocation affect my taxes?
There are tax implications to rebalancing your portfolio to maintain your target asset allocation. For example, when you sell an appreciated investment in a taxable account, you may incur either long- or short-term capital gains. Therefore, be sure to check with your tax advisor when making shifts in your portfolio.