Years ago, conventional wisdom was that your portfolio should get more conservative as you age. One widely quoted rule of thumb was that the amount you should have in bonds should match your age. So a 60-year-old would have a 60% bond/40% stock portfolio, a 70-year-old would have a 70% bond/30% stock portfolio, and so on.
While that rule of thumb may have worked decades ago when the average retiree was dead within 10 years of retiring, it clearly doesn’t work today - when 57% of those retiring today are planning to live to at least 90 (TransAmerica (2015) The Current State of Retirement: Pre-Retiree Expectations and Retiree Realities.)
When deciding on the “right” mix for your portfolio, it’s important to consider many things including “how long does your money need to last?” because you don’t want to run out of money before you run out of you! The longer your life expectancy, the more growth (translate that into ‘equity exposure’) you will need.
What do you expect inflation to be in the future? Again, if inflation rises in the future, equity exposure is needed to offset this. On the other hand, your portfolio (and you) have to pass the “pillow test” – which means you can put your head down on the pillow at night and still sleep (relatively) soundly, despite what is going on in the markets and economy around you.
When investors chase returns and take risk they can’t stomach, they are the first to bail out when the market goes down. And selling in a downturn locks in those losses and can be fatal to your retirement dreams. Finding the right mix of growth, risk and safety is essential for the health of your retirement, and it often takes a professional to help you find that perfect recipe.