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Asset Allocation Made Simple As you accumulate retirement assets, the most important decision you need to make is how the assets are going to be invested. The allotting of your retirement assets across stocks, bonds, money market, and other investments is referred to as asset allocation. Your asset allocation decision, more than most other decisions, will determines how fast your retirement account will grow. Is it difficult to do? Not really, but like most investment issues you do need to know some basics. - Invest for the Long-term: Once you set your allocation, be patient. Discipline yourself to maintain your allocation through down markets as well as up markets.
- Invest for Growth: Equity mutual funds (stocks) need to be an important part of your allocation, even in retirement. Don't worry about short-term ups and downs in the stock market. Over time, stocks have usually outperformed all other types of investments while staying ahead of inflation. Make equity mutual funds the core of a long-term investing strategy.
- Know Yourself: Understand your tolerance for risk. Ask yourself, "Can I sleep at night with my retirement dollars allocated this way?" If the answer is no, make a change. Don't create undue emotional stress.
- Diversified Your Portfolio: This is what good asset allocation is all about. Don't put all your assets into one asset class. Spread them among different asset classes and investment styles. Doing so will spread your assets over an assortment of investments and should reduce your risk. You can learn more about asset styles by clicking here.
- Review Annually: Take the time once a year to review your life circ*mstances and long-term goals. Based upon the results of your review, adjust your allocation. Even if nothing has changed, you may need to rebalance your portfolio to bring it back into line with your allocation objectives.
- Fees and Costs: Like everything, mutual funds and other 401k investment options carry costs, and they can vary greatly from fund-to-fund. Since high fund costs can impact your long-term investment earnings, you need to know what the fees are -- so ask.
You must make your own allocation decisions based upon your individual situation, but we can give you some general "rule of thumb" asset allocations based upon age. You can use these as a starting point. We assume retirement at age 65. - Age: Less Than 40 -- 100% in equities. Of this, 40% invested in large cap. growth funds, 25% small cap. growth funds, 25% in large cap. value funds, and 10% international. Another option is to use several good index funds.
- Age: 40 to 50 -- 80% in equities and 20% in fixed income. Of the equity portion, 40% invested in large cap. growth funds, 25% small cap. growth funds, 25% in large cap. value funds, and 10% international. Another good option for your equity portion is to use good index funds.
- Age: 51 to 55 -- 70% in equities and 30% in fixed income. Of the equity portion, 40% invested in large cap. growth funds, 25% small cap. growth funds, 25% in large cap. value funds, and 10% international. Another good option for your equity portion is to use good index funds.
- Age: 56 to 60 -- 50% in equities and 50% in fixed income. Of the equity portion, 40% invested in large cap. growth funds, 10% small cap. growth funds, 40% in large cap. value funds, and 10% international. Another good option for your equity portion is to use good index funds.
- Age: 61 to 65 -- Reduce equities by 5% per year and increase fixed income by 5% per year so that at retirement you have 25% in equities and 75% in fixed income. Of the equity portion, 40% invested in large cap. growth funds, 10% small cap. growth funds, 40% in large cap. value funds, and 10% international. Another good option for your equity portion is to use good index funds.
Target-Date Funds As you may have learned, trying to make well-informed asset allocation decisions is not easy. One investment alternative that has surged in popularity over the past years is called a target-date fund. With this type of fund, the fund manager will make the asset allocation decisions for you according to the amount of years you have until retirement. They automatically rebalance the fund to become more conservative as you gets closer to retirement. It's like putting your 401k account on autopilot. Most 401k plans today offer target-date funds, so check with your plan administrator to see what is available to you. Additional Reading The Value of Asset Allocation, Boost Your 401k Returns by Rebalancing, and Nurture Your 401k Portfolio Using Asset Allocation. This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan. | FAQs
401(k) Portfolio Allocations by Risk Profile
An aggressive allocation: 90% stocks, 10% bonds. A moderately aggressive allocation: 70% stocks, 30% bonds. A balanced allocation: 50% stocks, 50% bonds. A conservative allocation: 30% stocks, 80% bonds.
What is a good asset allocation for a 401k? ›
401(k) Portfolio Allocations by Risk Profile
An aggressive allocation: 90% stocks, 10% bonds. A moderately aggressive allocation: 70% stocks, 30% bonds. A balanced allocation: 50% stocks, 50% bonds. A conservative allocation: 30% stocks, 80% bonds.
What three 3 ways should you allocate your assets in retirement? ›
Here are some thoughts:
- Set aside one year of cash. At the start of every year, make sure you have enough cash on hand to supplement your annual income from annuities, pensions, Social Security, rental properties, and other recurring sources. ...
- Create a short-term reserve. ...
- Invest the rest of your portfolio.
Choosing the allocation that's right for you
- Your goals—both short- and long-term.
- The number of years you have to invest.
- Your tolerance for risk.
In your later years, a conservative allocation of 30% cash, 20% bonds and 50% stocks might be appropriate. Diversified portfolios typically include a core of at least 50% stocks in part because equities alone offer the potential to generate long-term returns exceeding inflation.
What is the 4 rule for asset allocation? ›
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
What is the most successful asset allocation? ›
Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.
What is the golden rule of asset allocation? ›
Rule of Thumb for Asset Allocation based on age of investor
You can use the thumb rule to find your equity allocation by subtracting your current age from 100. It means that as you grow older, your asset allocation needs to move from equity funds towards debt funds and fixed income investments.
What is the most valuable asset in a retirement plan? ›
Your Home. If your employee retirement plan isn't your largest retirement asset, then your home very well could be. While you may not have any plans to sell your house anytime soon, it's essential to account for the value of your home and think of it as an asset.
How much should a 72 year old retire with? ›
How Much Should a 70-Year-Old Have in Savings? Financial experts generally recommend saving anywhere from $1 million to $2 million for retirement. If you consider an average retirement savings of $426,000 for those in the 65 to 74-year-old range, the numbers obviously don't match up.
Know how much risk you're comfortable with
As a rule of thumb, you can subtract your age from 110 or 100 to find the percentage of your portfolio that should be invested in equities; the rest should be in bonds. Using 110 will lead to a more aggressive portfolio; 100 will skew more conservative.
What is the best asset allocation mix? ›
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
How much of my 401k should be in bonds? ›
Asset Allocation
There are various rules of thumb you can use to determine your ideal asset allocation. The 60/40 rule, for example, dictates having 60% of your portfolio in stocks and 40% dedicated to bonds. Or you may use the rule of 100 or 120 instead, which advocates subtracting your age from 100 or 120.
What is the ideal 401k asset allocation? ›
Your asset allocation is the percentage of your money that you want to invest in each particular asset category. For example, you might want to allocate 70% of your portfolio to stock investments, 20% to bond investments, and 10% to "cash" investments, such as a money-market fund.
Where is the safest place to put a 401k after retirement? ›
Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
What is the best 401k mix for a 60 year old? ›
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
What is the 12 20 80 asset allocation rule? ›
Set aside 12 months of your expenses in liquid fund to take care of emergencies. Invest 20% of your investable surplus into gold, that generally has an inverse correlation with equity. Allocate the balance 80% of your investable surplus in a diversified equity portfolio.
What should your 401k portfolio look like? ›
Ideally, you'll choose a mix of stocks, bonds, and cash investments that will work together to generate a steady stream of retirement income and future growth—all while helping to preserve your money.
What percentage of my 401k should be in stocks? ›
In the ideal scenario, the older investor has stashed those big early gains in a safe place while still adding money for the future. Traditional guidance is that the percentage of your money invested in stocks should equal 100 minus your age.
Is 70 30 a good asset allocation? ›
A 70/30 asset allocation increases your equity holdings to 70% of your portfolio and decreases the bond holdings in your portfolio to 30%. In recent years, the 70/30 asset allocation has become more popular. But many investors still prefer a 60/40 portfolio based on lower risk tolerance.
