Retired? Flex your investing muscle

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

Ultimate Guide to Retirement

• Getting started
• 401(k)s & company plans
• Investing
• Annuities
• IRAs
• Self-employment plans
• Pensions and benefit plans
• Social Security
• Insurance
• Estate planning
• Living in retirement
• Getting help

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NEW YORK (Money) -- Question: What is the most aggressive asset allocation that a 70-year-old retiree should have? --Martin Reynoso, Albuquerque, New Mexico

Answer: Your question is kind of like asking how vigorous an exercise program a 70-year-old can engage in.

The answer is "not very" if that person has medical problems, leads a largely sedentary lifestyle and hasn't broken a sweat since the Carter administration.

If, on the other hand, someone in his or her 70s is healthy, fit and has been working out regularly, then he or she may be able to handle quite rigorous workouts.

Well, a similar principle applies to investing, which is to say that the way you allocate your retirement portfolio among stocks, bonds and cash should depend not just on your age but your individual circumstances.

For example, if you're 70, your only source of regular income is Social Security and you have a relatively small portfolio of investments that you depend heavily on to supplement your Social Security check, then you can't afford to get too aggressive in your investment strategy. If your small nest egg takes a big hit, your standard of living could suffer dramatically.

If, on the other hand, you have a generous pension in addition to Social Security, plus a relatively large retirement portfolio on top of that, then you can afford to take a bit more risk with your investments if you wish. If your portfolio gets whacked and you've got to scale back withdrawals, your lifestyle won't be in serious jeopardy since you've still got your other income to support you.

Of course, most of us probably exist in between these two extremes. We need to invest cautiously enough so a major setback in the market won't derail our retirement plans. But we don't want to totally wimp out. Otherwise, our assets combined with Social Security and pensions may not provide us with enough income to maintain our standard of living throughout retirement in the face of inflation.

So how does this balancing act translate to portfolio allocations for someone your age?

Ultimately, it comes down to a judgment call on your part, but I'd say that a stock allocation of somewhere between 25% to 40% is a reasonable range -- enough for you to get at least some long-term growth potential while also keeping the downside manageable.

Again, though, this is a starting point from which you need to tailor your allocation given your financial situation and your tolerance for risk. If you have little in the way of overall financial resources and you get queasy when the market drops even 10% or so, then you'll want to be at the low end of that range, or maybe even below it.

If you've got a nice financial cushion (pension, plenty of savings, lots of home equity, etc.) and the market's gyrations don't unduly fluster you, then you may want to be at the higher end of that range.

Keep in mind too that your appetite for risk can be hard to pin down. After watching the market drop over the past year (and seeing account balances plummet along with it), many investors are much more reluctant to own stocks. Perhaps too reluctant.

Conversely, back at the end of 2007 when things were still going well, investors felt much more confident about stocks. Too confident in many cases.

The point is that you don't want your allocation to be merely an emotional reaction to your recent investing experience. Rather, you want to set an allocation that you will be comfortable with whether the market is soaring or sinking.

One way to do that is to see how different mixes of stocks and bonds are likely to behave. For example, Morningstar's Asset Allocator tool has interactive sliders that allow you create different mixes of domestic and foreign stocks as well as bonds and cash. The tool then shows the expected annual return for that portfolio as well as the possible three-month loss. No tool is a crystal ball, but by trying a variety of different allocations, you can see how much more volatile one is compared to another, and then decide which is right for you.

An even better gauge of what allocation makes the most sense for you is to see the effect different mixes have on your ability to sustain an acceptable level of income throughout retirement.

If you go T. Rowe Price's Retirement Income Calculator and plug in your age, the value of your retirement savings, your Social Security benefit and the amount you'd like to spend each month in retirement, you can see the odds that a specific mix of stocks, bonds and cash will be able to generate the income you'll need. You can then go through this exercise again with other blends of stocks and bonds and compare the results.

Like an exercise program, asset allocation isn't a one-size-fits-all deal. It's something that should be tailored to your needs. If you start from that premise and check out the tools I've suggested (or work with an adviser who has access to similar or even better ones), you should be able to settle on a blend of investments that suits you.