investment allocation

Investment Allocation Tools To Fund Retirement

Author: AB Staff

Investment Allocation Tools To Fund Retirement

Editor Pick 2 Finances

Funding A Long Retirement

Young investors are often told to embrace risk in their portfolios. The ups and downs of the markets are an ally in the pursuit of long-term growth, and losses only matter when they’re realized. Rarely is this common and often correct advice applied to investors that are nearing retirement. But indeed it should. Not because sixty is the new forty, but because investment allocation decisions should be based on when the invested funds will be needed, not on how old you happen to be.

The happy fact is that people nearing retirement often have a long time horizon ahead. The challenge is in funding a long retirement. While many will begin withdrawing money from their retirement accounts shortly after they retire, the amount withdrawn as a percentage of the total portfolio can vary greatly. Pensioners and those with a low-cost of living, may find that their guaranteed income sources satisfy most of their spending needs, while others have to rely on portfolio withdrawals to meet theirs. Rather than using age to guide your investment strategy, consider something far more useful: a budget.

A Strategic Asset Allocation

A budget tells you the extent to which you will rely on your financial assets to satisfy your retirement spending needs and your capacity to embrace investment risk. Armed with your budget, a listing of assets, an inventory of your retirement income sources, and the taxable consequences of the withdraws, it’s time to get to work on your investment allocation.

For those fortunate enough to rely only minimally on portfolio withdrawals to meet ongoing spending in retirement, their investment time horizon may be quite long and their capacity for investment risk quite high. For those who need larger withdrawals to meet retirement needs, they need to take into account the risk of a market downturn.

A common rule of thumb suggested that retirees invested in a balanced portfolio of 60% stocks and 40% bonds could begin withdrawing 4% of their portfolio’s value at retirement and continue these withdrawals, adjusted for inflation, for a period of up to 30 years. Updated research, however, suggests otherwise. Historically low interest rates are to blame, as is the risk posed by poor market returns early in retirement. The message to these investors is clear: a comprehensive retirement income plan, and not simply an asset allocation strategy is needed.


investment allocation


Investment Allocation Tools

Investors have a variety of tools at their disposal.

  • One simple way to be less reliant on your investments for retirement income is to trade some portfolio assets for a guaranteed income annuity. These come in many varieties; those near retirement should focus on annuities that offer a high-level of income that is not directly correlated to the performance of equity markets. Qualified Longevity Annuity Contracts (QLAC), which defer income until later in retirement, may also be evaluated as a way to provide an income top off later in life.
  • Older investors may also wish to create specific investment allocations that are matched to immediate and long-term spending needs. This so called bucket approach, seeks to divide assets into a safe bucket that will be used to fund near-term income and a riskier bucket(s) that is invested for growth. Investors would deploy assets in their “safe bucket” to less volatile asset classes and those that produce high levels of current income.  Investments that are earmarked for future spending could be allocated to a diversified portfolio of stocks that focuses primarily on growth. Over time, the short term bucket can be refilled by selling those investments in the long-term bucket that have performed well. This approach provides protection from poor investment returns early in retirement (think of those that retired in 2008), and has the added benefit of clearly delineating the sources of retirement income.

Investors nearing retirement should focus less on their chronological age and more on their retirement income needs and capacity to embrace risk. An investment allocation strategy that considers spending needs and matches income sources can help increase peace of mind and keep investors on course.  

What investment allocation tool do you use? How do you keep a balanced portfolio? Share your answers on our community forum! Request a free consultation from The Gassman Financial Group.

Written by:  John Male CFP®, RICP® – The Gassman Financial GroupThe Retirement Maven™
John Male provides comprehensive  financial  planning, estate planning, and investment advisory services to individuals and businesses. A Certified Financial Planner® and Retirement Income Certified Professional®, his primary focus is on the development and implementation of customized retirement income strategies.