Whether you’re 25 or 70, your retirement stash should include a diversified mix of stocks and a fixed-income component of bonds and cash.
Stocks provide the growth to bolster your savings and combat inflation; the fixed-income investments protect against market losses.
The mix itself? If you’re in your 20s, you can afford to allocate 80 percent or more of your portfolio to stocks; after all, you have plenty of time to recover if the market tanks.
As you get closer to retirement, however, you’ll want to pare that side of your portfolio to 40 percent to 60 percent, depending on your risk tolerance, leaving the rest in bonds and cash. Although bonds might seem risky these days because of low yields, rising interest rates (when rates rise, bond prices fall) and the prospect of longer-term inflation, they remain key to a diversified portfolio, especially for retirees.
Still, with the market going gangbusters, your allocation could easily get out of whack, leaving you more heavily invested in stocks than you want to be.
“At least once a year, review and rebalance your portfolio so you have a proper proportion of cash, stocks and bonds,” said Jon Ten Haagen, a certified financial planner in Huntington, N.Y.
No reason to obsess over a percentage point or two, but if the mix has drifted by five percentage points or so, it’s time to adjust.
Some 401(k) plans and IRAs offer the option of automatic rebalancing, but that resets to the mix you already have.
“You’re not ratcheting it down as you get closer to retirement,” said Andrew Miller, director of financial services for the Principal Finance Group. Instead, consider a target-date fund, which grows more conservative as you get closer to the target year while regularly rebalancing to keep the proper mix.
Each target-date fund operates a little differently. For instance, Fund A might keep you more heavily invested in stocks as you head into retirement than Fund B, or it might downshift to bonds over a longer period.
Be sure you’re comfortable with the style of the fund before entrusting your savings to it. Our favorites among target-date families are Vanguard and T. Rowe Price.Jane Bennett Clark is a senior editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org. For more on this and similar money topics, go to Kiplinger.com.