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Asset Allocation: The Savvy Investor
Dear Jeff:
I have 95 percent of my investments in stocks, blue chip and growth funds. I would like to retire in three years at age 60. Should I consider moving some into bonds or CDs? This shall be my only income until I draw Social Security. I have everything paid for and would like to travel some. I should be able to live on $40,000 a year.
Jeff Says:
Your portfolio should probably be re-allocated so that you own a larger percentage of bonds or fixed rate assets. Ninety-five percent of a portfolio invested in equities such as stocks, blue chip mutual funds and growth funds three years prior to retirement is far more aggressive than most could handle from a risk tolerance point of view.
The other concern is the volatility you could experience with such a large exposure to the equity side of the asset allocation equation. What would happen if the market experienced a significant correction and your portfolio decreased in value by 15 or 20 percent? Would you still be comfortable? What if you needed some money and took a withdrawal from the account at that point? It is absolutely the wrong time to sell your growth funds for the necessary distribution.
Planners would generally agree with me that you should increase your holdings in bonds. Undoubtedly, there would be a difference of opinion as to how much that percentage should be -- rightfully so, as it is determined by so many factors. However, as a general rule of thumb, the starting point is approximately 60 percent in bonds for a person around 60 years of age. If you are very comfortable with your stock and equity investments, then you certainly could maintain a lower percentage in bonds.
As you can see, the percentages may vary, but my advice does not. Consider some changes in your current allocation to include more bonds and fixed rate investments.
More Info
For more information on asset allocation, visit the ThirdAge Asset Allocator.
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