Last Updated May 17, 2011 6:21 PM EDT
But how do you decide your asset allocation within this one-third/two-thirds range? One of the most important considerations is whether a significant stock market decline would reduce your retirement income below the amount you need to cover your living expenses.
Following is a checklist of considerations. You might consider investing at the higher end of the above range for stock allocations if:
- You have other sources of reliable retirement income from secure sources, such as Social Security, pensions and annuities, and these sources go a long way to covering your living expenses.
- If your total income from all sources, including your retirement investments, significantly exceeds your living expenses. This might happen if you've paid off your mortgage, downsized your house, or have otherwise reduced your living expenses.
- You are confident you would not panic if your investments depreciated suddenly due to a stock market decline. Mutual funds with asset allocations of two-thirds to stocks depreciated by 30 to 35 percent during the recent stock market crash, from the pre-crash high in late 2007 to the low during the crash. Could you sleep at night, knowing there might be a repeat event?
- You're in your 60s or 70s, with enough remaining lifetime to ride out future stock market declines.
On the other hand, you might consider investing at the lower end of the above range for stock allocations if:
- You don't have much margin between your total retirement income from all sources and your living expenses, and you can't tolerate much volatility in your retirement income. If you sold last time stocks fell, you don't want to be in the same position the next time it happens.
- If the thought of a significant decline in your retirement savings causes you to lose sleep at night. One such mutual fund with an asset allocation of a little more than one-third in stocks is Vanguard's Wellesley Fund, which declined by almost 19 percent from its pre-crash high in late 2007 to the low during the crash. Not good news, but you're not wiped out either. And now this fund has also exceeded its pre-crash high.
- You're in your eighties or nineties, and may not have enough remaining lifetime to ride out future stock market declines.
I'm also a fan of simple investments during retirement as you get less able and less interested in managing your money. You can get these with no-load, low-cost balanced funds or target date funds from the large mutual fund families, as mentioned above.
It's important that you research the appropriate asset allocation and specific investments you'll need to make to generate retirement income. Doing so will help you sleep better at night and, I hope, give you enough money to spoil your grandchildren!
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