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As you approach retirement, it’s natural to wonder how much of your portfolio should be invested in stocks. While the traditional rule of thumb was to subtract your age from 100 to determine your stock allocation, the increasing longevity of Americans has prompted financial experts to reconsider this approach.
This article will explore the factors influencing how much a 70-year-old should have in stocks, including:
- The evolving “100 minus age” rule: While the traditional formula suggests a 30% stock allocation for a 70-year-old, many experts now recommend a higher allocation, closer to 110 or 120 minus your age.
- Target-date funds: These funds automatically adjust their asset allocation based on your target retirement date, typically holding a higher percentage of stocks than the traditional “100 minus age” formula.
- Stock market risks during retirement: While stocks offer the potential for higher returns, they also carry greater risk. It’s crucial to consider your risk tolerance and the potential impact of market downturns on your retirement income.
- The opportunity presented by higher interest rates: Rising interest rates have made bonds more attractive, offering a lower-risk alternative to stocks. This could be an opportunity to diversify your portfolio and reduce your exposure to market volatility.
Understanding the Evolving “100 Minus Age” Rule
The traditional “100 minus age” rule was a simple way to determine asset allocation based on your age and proximity to retirement. For a 70-year-old, this would suggest a 30% allocation to stocks. However, with Americans living longer and requiring their retirement savings to last for an extended period, many financial advisors now recommend a higher stock allocation, closer to 110 or 120 minus your age.
This shift reflects the need for retirees to generate sufficient returns to cover their living expenses for a potentially longer retirement period. Additionally, advancements in healthcare and technology have led to an increased life expectancy, making it essential to have a portfolio that can sustain growth over a longer timeframe.
Target-Date Funds: A Hands-Off Approach to Asset Allocation
Target-date funds are a popular option for investors who prefer a hands-off approach to asset allocation. These funds automatically adjust their asset allocation based on your target retirement date, gradually shifting towards safer investments as the target date approaches.
While target-date funds offer convenience, it’s important to note that they may still hold a higher percentage of stocks than the traditional “100 minus age” formula. For example, the Vanguard Target Retirement 2025 Fund currently has about 56% of its assets in stocks, significantly higher than the 30% suggested by the traditional formula.
Balancing Risk and Return: Navigating the Stock Market During Retirement
While stocks offer the potential for higher returns, they also carry greater risk. As a retiree, it’s crucial to consider your risk tolerance and the potential impact of market downturns on your retirement income. If you have a low risk tolerance, it may be wise to allocate a smaller portion of your portfolio to stocks and focus on more conservative investments such as bonds.
However, if you have a higher risk tolerance and are comfortable with the potential for volatility, you may choose to allocate a larger portion of your portfolio to stocks. This could provide the opportunity for higher returns, which can be essential for generating sufficient income to cover your living expenses throughout a potentially longer retirement.
Diversifying Your Portfolio with Bonds: Taking Advantage of Higher Interest Rates
Rising interest rates have made bonds more attractive, offering a lower-risk alternative to stocks. This could be an opportunity to diversify your portfolio and reduce your exposure to market volatility. Bonds provide a steady stream of income through regular interest payments, making them a valuable component of a diversified retirement portfolio.
By investing in bonds, you can mitigate the risks associated with a high stock allocation and ensure a more stable income stream during retirement. This is especially important in today’s economic climate, where inflation and market volatility can pose significant challenges to retirees.
The right stock allocation for a 70-year-old depends on various factors, including risk tolerance, retirement goals, and individual circumstances. While the traditional “100 minus age” rule provides a starting point, it’s essential to consider the evolving landscape of retirement planning and adjust your approach accordingly.
By carefully analyzing your individual needs and risk tolerance, you can determine the optimal stock allocation for your retirement portfolio. This will help ensure that your savings last throughout your retirement years, providing you with the financial security and peace of mind you deserve.
Frequently Asked Questions
How much should a 70-year-old have in stocks?
The answer depends on various factors, including risk tolerance, retirement goals, and individual circumstances. While the traditional “100 minus age” rule suggests a 30% stock allocation, many financial advisors now recommend a higher allocation, closer to 110 or 120 minus your age.
What are target-date funds, and are they suitable for retirees?
Target-date funds automatically adjust their asset allocation based on your target retirement date. They can be a convenient option for retirees who prefer a hands-off approach to asset allocation. However, it’s important to note that they may still hold a higher percentage of stocks than the traditional “100 minus age” formula.
How can I balance risk and return during retirement?
Consider your risk tolerance and the potential impact of market downturns on your retirement income. If you have a low risk tolerance, allocate a smaller portion of your portfolio to stocks and focus on more conservative investments. If you have a higher risk tolerance, you may choose to allocate a larger portion to stocks for the potential for higher returns.
How can I take advantage of higher interest rates?
Consider investing in bonds, which offer a lower-risk alternative to stocks and provide a steady stream of income through regular interest payments. This can help diversify your portfolio and reduce your exposure to market volatility.
How can I find the right stock allocation for my individual circumstances?
Carefully analyze your individual needs and risk tolerance. Consider working with a financial advisor who can help you create a personalized retirement plan and determine the optimal stock allocation for your portfolio.
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For the majority of the last ten years, the stock market has been booming, with annualized returns of roughly 12% through the end of July 2023. In addition, during the previous ten years, interest rates have remained close to all-time lows, which may have led retirees’ stock holdings to rise as they pursued better stock market returns.
After you retire, how much should you have invested in stocks? Here are some tips for thinking about asset allocation in retirement and the dangers of having too much invested in stocks.
Want professional advice on retirement planning or investment management? Bankrate’s AdvisorMatch can put you in touch with a CFP® advisor to assist you in reaching your financial objectives.
Generally speaking, investors have allocated the assets in their retirement portfolios according to how long they intend to wait to retire. An investor who has decades of work ahead of them before retiring will usually allocate a larger portion of their portfolio to stocks because they provide higher returns and give investors ample time to recover from short-term volatility.
Because you’re getting closer to the time when you’ll need the money for various living expenses, your portfolio allocation shifts toward safer investments as you approach retirement, such as bonds or other fixed-income securities. You give up the profits that stocks provide in exchange for the security that bonds provide. However, determining the precise proportion of stocks or bonds to own can be challenging.
In the past, it was common practice to calculate the approximate proportion of stocks in your portfolio by subtracting your age from 100. For instance, if you were 70 years old, your stock holdings would make up around 30% of your total assets.
As per Keith Beverly, Chief Investment Officer of Re-Envision Wealth, “that formula is generally a good place to start.” However, Beverly notes that the precise figure will depend on a number of variables, including the investor’s risk tolerance, the state of the economy, and the stocks that are included in the portfolio.
A Vanguard report on retirement plans it oversees indicates that at the end of 2022, approximately 42% of the portfolios of investors aged 70 and above were devoted to stocks.
By choosing to include target-date funds in their portfolios, many investors have effectively outsourced the decision about asset allocation. These funds are managed with a specific retirement date in mind, and as that date approaches, the assets in the portfolio are progressively moved toward safer investments like bonds.
However, target-date funds may allocate more stocks than you might anticipate. As of August 9, 2023, the Vanguard Target Retirement 2025 Fund (VTTVX) had roughly 56% of its assets in stocks, which is significantly more than what the “100 minus age” formula recommends. Approximately 72% of the assets of the Vanguard Target Retirement 2035 Fund (VTTHX) are in stocks.
In order to ensure that their portfolios last for a long time, retirees of today might need to hold more stocks than those of previous generations, according to Lazetta Rainey Braxton, co-CEO of the financial planning and wealth management firm 2050 Wealth Partners.
“Retirees may be cautious when it comes to risk; the question is how much can they afford to take, given that they will require growth,” Braxton said.
According to Braxton, an investor who is 70 years old and has 30% invested in stocks and 70% in fixed income may find it difficult to meet their needs for expenditures if they live to be 90 years old. Usually, the answer to the question “Is the (fixed) income portfolio) generating enough money to carry another two decades?” is “no.” ”.