Retired? How much money should you keep in stocks?

retirement stocks

What percentage mix of stocks and bonds should I shoot for with my retirement savings once I retire?--R.M., Michigan

Considering how many retirees must grapple with this issue and the fact that allocating one's assets between stocks and bonds is a key element of any retirement income plan, you might think that there would be a stocks-bonds mix that most retirement experts would generally agree is correct.

But there's not, so I can't give you a specific percentage to shoot for.

I can, however, point you to three ways that investors typically deal with this issue, and then tell you what I think you should do to arrive at a reasonable blend of stocks and bonds for your own nest egg.

One method many retirees employ is what's known as a "static" asset allocation. You settle on a mix that offers a reasonable tradeoff between risk and return -- likely in a range between 40% stocks-60% bonds and 60% stocks-40% bonds for most retirees -- and you then largely maintain that blend throughout retirement by periodically rebalancing, or selling some stocks and plowing the proceeds into bonds if stocks have been on a roll or doing the reverse if stocks have lagged. A balanced fund -- a type of mutual fund that generally keeps 60% of its assets in stocks and 40% in bonds -- is a classic example of static asset allocation.

Asset allocation: Fix my mix

A second option is to go with a "glide path." Typically, this involves starting with roughly 50% to 60% of your nest egg in stocks and then gradually shifting toward bonds until you hit a mix of, say, 30% stocks and 70% bonds in your early to mid-70s, where the mix would remain for the rest of retirement.

Most target-date retirement funds follow this general approach on the theory that investors want to take less risk as they age, although not all target-date funds start with the same stock percentage at retirement or end up with the same percentage in bonds, and some may not arrive at their most conservative stocks-bonds mix until you're in your late 70s or early 80s).

And then there's a relatively new twist on the glide path I described above that's known as a "reverse" or "rising equity" glide path. Based on research by financial planner Michael Kitces and American College professor of retirement income Wade Pfau, the idea is that instead of reducing your stock exposure during retirement you increase it, starting, say, with 30% in stocks and gradually boosting your stock percentage until it reaches maybe 60%. The rationale is that by starting out with a more conservative mix that better protects your portfolio early in retirement, a rising equity glide path reduces the risk that you'll run through your savings too soon.

Related: The basics of retirement investing

Each of these approaches has its merits. And I think you could do okay following any one of them. But I think you might also want to consider a different approach, one that doesn't require you to commit to any particular system.

Start by getting a handle on how much risk you're willing to accept. For any asset allocation to be effective over the long run, it's got to jibe with your true tolerance for risk. Invest too aggressively, and you may bail out of stocks during severe downturns, realize losses and miss gains on the rebound. Err on the side of too much caution, and you may be tempted to ratchet up your stock stake during market surges, leaving you more vulnerable than you should be when the market eventually falters.

You can get a decent sense of how much risk you're willing to take on by completing a risk tolerance-asset allocation questionnaire. For example, Vanguard's free version will suggest a stocks-bonds mix based on, among other things, how large a setback you feel you can handle without panicking. It will also show you how your recommended mix and others more aggressive and more conservative have performed on average over many decades and in past markets good and bad.

Related: How should I invest my retirement savings?

Whatever your recommended allocation is, you may also want to consider refining it based on the depth of your retirement resources. For example, if Social Security covers all or most of your basic living expenses, you could consider upping your stock exposure a bit, as you'll have more flexibility for paring withdrawals from your portfolio if the market falters. The same goes if you'll have guaranteed income from an annuity, or if your nest egg is so large that your chances of running through it are minimal. If, on the other hand, you've got a relatively small nest egg and few resources to fall back on, then you may want to go with a somewhat more conservative mix.

After going through this process I expect that most people in the early stage of retirement will arrive at an asset allocation somewhere between 40% stocks-60% bonds and 60% stocks-40% bonds. The question then becomes whether you should adjust that mix as you age.

My take: As in setting your mix initially, your tolerance for risk should be your primary guide.

Related: The 5-minute 401(k) investment plan

If you're like most people, you'll likely become more risk averse as you go through retirement. Which means you'll probably want to lower your portfolio's stock stake over time. That doesn't mean you have to do it every single year or stick to a rigid schedule, but as you get older, you'll likely shift more toward bonds so that your portfolio continues to reflect your appetite for risk.

That said, given today's long lifespans, you'll still want to maintain some stock exposure -- say, 20% to 30% -- even very late in life so you don't outlive your savings.

On the other hand, if you started with a low stock stake specifically to protect your wealth against a big setback or subpar returns early in retirement, then you may want to gradually boost your stock stake in order to earn higher returns later in retirement to ensure your savings will last. But again, your risk tolerance should be your guide. No matter how compelling the case may be for a rising equity glide path -- and it is compelling -- I think it would be a mistake to stick to a system that called for ever-higher stock allocations if doing so would require you to take on more risk than you can actually handle.

Bottom line: Arriving at a stocks-bonds mix is ultimately a judgment call that involves art as much as science. But if you start from the premise that your retirement portfolio should generally reflect your appetite for risk -- and you periodically re-assess your risk tolerance and your portfolio throughout retirement to make sure they're in sync -- you should be able to settle on an allocation that works for you.

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