Asset allocation, including how much of your money to keep in stocks, takes on added importance during retirement. Your nest egg must provide income for living expenses and keep up with inflation. And the money must last as long as you do. According to the IRS life expectancy table, a 73-year-old has another 25 years of living to pay for. Stocks provide a growth factor in a portfolio that might cover higher future expenses.
Rule of Thumb
The widely quoted rule of thumb for asset allocation between stocks and bonds is that the stock portion of your portfolio should be 100 minus your age. Using that "rule," your stock allocation would be 100 minus 73, or 27 percent of your investment portfolio. Although this rule of thumb has been around for years, view it as a starting point for allocating your investments. From the 27 percent in stocks, adjust your percentage up or down, based on your financial circumstances.
Size of Portfolio
The size of your portfolio in relation to your needs has a significant effect on your allocations. With a very large portfolio, you can go to extremes. You could invest it all in bonds and live off the interest. Or you could put half in stocks and let the markets boost your portfolio while you accepted the added volatility. If your income needs closely match the size of your portfolio, allocation becomes more important. You need to balance your portfolio so that it generates enough current income, with a portion in stocks to generate growth in future income.
Taking a Hit
Another way to look at the stock allocation in your portfolio is to determine how much of a loss you can accept, either financially or emotionally. Stocks can go down as well as up. Even though bear markets tend to last a short time -- one to two years -- it can take several years to recover the lost value. The worst bear market in recent years resulted in a 50 percent decline in the market. So think about a 50 percent drop in the stock portion of your portfolio. For example, if you have 30 percent in stocks, you could see the value of your portfolio drop by 15 percent.
Stock Comfort Level
How comfortable you are owning stocks, and living with their volatility, is an important factor in what portion of your retirement money should be in stocks. If you have owned stocks all your life and you understand there will be bad times along with the good, you can handle having a larger percentage of your portfolio in the stock market. On the other hand, perhaps you are putting stocks in your portfolio because your adviser tells you that's important for the long-term viability of your income. Listen to the adviser, but think about keeping the percentage in stocks toward the low end of whatever range you discuss.
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