Rebalancing Stocks, Bonds, and Cash as You Age

Portfolio Optimization as you Near Retirement

Rebalancing Stocks, Bonds, and Cash as You Age
May 17, 2016

You can finally see retirement in the horizon – lounging on the beach, jetting around the world, or puttering around in your backyard. Whatever your goals are, you will soon be realizing them, assuming you have saved and invested wisely.

How should your investments be rebalanced as you approach your retirement goals? The answer to that depends on four other questions: how much money do you need to finance your retirement goals, what is your current financial situation, how far apart are those two things, and how much time do you have to cover the gap between them?

Things You Need to Consider

Conventional wisdom says you should gradually shift out of riskier stocks and into more conservative bonds and cash as retirement draws near. You have less time to recover from stock losses, and you are likely to need more assets in liquid form during retirement. However, those axioms make assumptions on the current market, your risk tolerance, your investing acumen, and your expected expenses.

A standard age-based allocation philosophy is to invest your age in bonds and the remainder in stocks. In other words, at age 60 your portfolio should contain around 60% bonds and 40% stocks. Variations exist, but many don't stray far from this model.

In the above scenario, cash may be considered with bonds as part of the conservative investment component – but aside from emergency cash reserves, it may not be wise to keep cash on the sidelines in a savings account with infinitesimal interest. If not bonds, consider a relatively liquid money market account or CDs for cash beyond your reserves.

Assuming you have been following an asset-allocation philosophy for some time, you probably just need to stay the course. Rebalancing annually within the confines of your original plan is generally preferred – unless something has changed significantly

If you find you are way behind due to a late investment start, altered retirement plans, or poor investment results, that plan may go out the window. It is time for Plan B.

  • Reassess Your Plan – Did you underestimate how much money it would take to fund your retirement plans (as many people do)? If you changed your retirement plan late in the game, is that plan realistic? Go back to the beginning as if you were just starting a plan – reassess the money you need for retirement, and how much of a gap you need to cover.

  • Risk Tolerance – Your risk tolerance near retirement is probably not what it was in your early years. If that's the case, you may want to scale back your plans – but you still need to rebalance your portfolio to match your new goal and risk tolerances. If not, consider tilting your portfolio more toward stocks than your age would suggest.

  • Retirement Age – If your risk tolerance is low and you don't want to scale back your plans, are you willing to put off retirement for a few years to pursue that goal?

Asset allocations calculators are available online to help you correctly assess and act on the situation, but if you feel overwhelmed and that you need the advice of a professional, seek it.

In general, the philosophy of investing your age in conservative vehicles, with up to a small percentage bias toward higher amounts of stock, may be common. However, if your needs, risk tolerance, and plans suggest you do otherwise, go for it. Just make sure you understand the risks that are involved, and seek professional advice if you need it. You should choose your own investment allocation based on your particular objectives and situation.

Winnie Sun is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners, a registered investment advisor and a separate entity from LPL Financial.

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