The theory that you should ratchet back on risk as you age is generally a good one. A popular rule of thumb was to subtract your age from 100, the difference being the percentage of stocks you should keep in your portfolio. Then people started living longer, and the target number to subtract from became 110. For example, if you’re age 40, 70 per cent (110 minus 40) of your portfolio should consist of stocks when you're building towards retirement.
Even when you're done working, you'll still likely need to have at least some of your retirement portfolio in stocks to provide inflation-beating growth, however. In fact, some advisors believe the stock allocation shouldn't drop below 50% for many retirees.
But it’s important to realize that close to two thirds of your investment earnings may actually come from post-retirement returns, says Russell Investments Canada. Good news, considering that most investors haven’t been having much luck recently making money before they retire.
Based on Russell’s 10/30/60 ratio, the pattern of your investment earnings during retirement will likely be derived something like this:
- 10% from money you saved during your working years
- 30% from the growth of your savings before you retire
- 60% from growth that occurs once you retire
Because the scheduled withdrawals go up relentlessly every year, they take an increasing bite out of your nest egg. Withstanding that ever-growing bite requires stability, which means minimizing volatility and negative returns like those we’ve seen lately.
The key, therefore, is having the right portfolio mix in place during retirement – one that balances the stability of bonds with the continued growth potential of stocks. What’s the optimal mix? A relatively conservative blend of 35% stocks and 65% bonds, Russell suggests.
How does your portfolio match up?
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