Should you change your asset allocation in retirement?


If you’ve just retired or are considering retiring, you’re probably wondering how to position your investments for the future. Conventional wisdom suggests that investors should change their asset allocation in retirement to be more cautious. However, depending on your pre-retirement asset mix, income sources / needs, and long-term goals, this may not be recommended. Here are some things to consider when thinking about how to prepare your portfolio for retirement.

How to adjust your asset allocation in retirement?

While there are no quick fixes that are right for every situation, there are several things to keep in mind when considering your retirement portfolio. This includes revisiting popular and sometimes archaic investment ideas.

Reconsider the 60/40 portfolio

Markets change over time. People are living longer. Interest rates are not stagnating. The correlations between asset classes are changing. Employer benefit plans change, often transferring the risk of retirement to the employee. These are just a few of the factors that cause professional wealth managers to question the traditional 60/40 retirement portfolio.

For example, consider how falling interest rates have affected bond yields over the past several decades. In the 1980s bond yields were really strong. True, inflation averaged around 6% and mortgage rates were very high, but since then both interest rates (as measured by 10-year cash in the chart below) and bond yields have been falling. falling.

Over the past 10 years (ending 9/27/2021), bonds¹ have produced an average annual return of 3.08%. Inflation² was around 2% on average. In other words, barley fixed income yields have kept pace with inflation, before taxes. New retirees may need their portfolios to last 40 years, which can be difficult to do if the allocation of their retirement assets is based on decades-old rules of thumb.

Living off wallet income can be hard to do

Many investors want to live off the income from their portfolio instead of dipping into capital. It looks good, but it’s harder than it looks.

As the JP Morgan chart illustrates, since the 1990s, dividends have started to represent a smaller portion of the overall total return of the S&P 500, compared to previous decades.

If you’re wondering how dividend yields translate into retirement income, here’s a simple example. At the time of writing, the dividend yield of the S&P 500 is 1.4% .³ So if you have a portfolio of $ 1,000,000, that charges annual dividend income of $ 14,000. Unless you have a pension or some other source of income, it is highly unlikely that dividend income alone will provide sufficient income in retirement. Especially after paying the tax!

When thinking about how to adjust your asset allocation in retirement, consider how different asset classes and sectors can increase retirement income. And be sure to put together a retirement spending plan within your means to make sure you don’t run out of money. As always, understand the risk / reward framework before investing.

For example, value stocks generally offer higher dividend income than growth stocks. However, they can be more volatile. So, in addition to income, you will also need to consider other factors, such as correlation with other asset classes, risk-adjusted returns, and sensitivity to interest rates and currency. economy in general.

Who are you investing in?

Not all retirees invest in the same thing. Some investors need to focus fully on maintaining their lifestyle without running out of cash. However, for wealthier retirees, this may not be of great concern. Instead, these people can mentally allocate part of their wallet to the next generation.

When considering changing your asset mix in retirement, consider all of your goals and your full-time horizon. For example, individuals should generally not take more risks than necessary to achieve their goals. But if one of those goals is to leave a legacy for adult children, it probably wouldn’t make sense to invest in an ultra-conservative way, as the portfolio can ultimately be invested for beneficiaries who have a time horizon. much longer.

Consider your whole situation

Developing an asset allocation should take into account your personal circumstances as a whole and understand that rules of thumb can be misleading. For example, consider a couple who have large retirement or social security benefits relative to their income needs. In one interpretation, they probably don’t need that much hike in their portfolio to beat inflation. On the other hand, because they don’t need to rely solely on their portfolio to meet their basic needs, they could potentially ‘afford’ themselves greater investment risk, perhaps to leave. an inheritance to their children or grandchildren if they wish. It’s complicated because there is no one right answer for every situation.

Bloomberg Barclays US Aggregate

² US Core CPI, seasonally adjusted, year over year

³ The dividend yield is calculated as consensus dividend estimates for the next 12 months, divided by the most recent price, as provided by Compustat. The forward price / earnings ratio is a bottom-up calculation based on estimates from JP Morgan Asset Management. Data as of 09/27/21.


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