Bond. James… Stocks, Funds, Cash and Bonds: What’s the Best Asset Allocation Strategy for Your Retirement??

Bond, James Bond. The mere mention of the name makes you think of cool confidence and absolute competence. Wouldn’t you like to feel that way about your retirement investments?  You perhaps can, assuming you can figure out the best asset allocation strategy for your retirement.
asset allocation strategy

What Exactly is Asset Allocation Anyway?

Asset allocation refers to how your money is invested in different types of asset classes like stocks, bonds, real estate, cash and other.

There is absolutely no single “best” asset allocation strategy that will work for everyone.  However, figuring out the best asset allocation strategy for YOUR retirement will be based on:

  • How much money you have overall.
  • When you will need access to the money.
  • Whether or not you are able to tolerate losses (either financially or emotionally).
  • Other financial goals you might have (like keeping pace with inflation, leaving a legacy and more).

You see, different types of investments will be better or worse for you, depending on how you answered the above questions. For example:

Stocks: Some asset classes — like stocks — are best if you want to grow your money and you have a long time before you will need to cash in. You need the long time horizon so that you can hopefully ride out any downturns in the financial markets.

Bonds: Bonds are a better bet if you need to be sure that your capital will be preserved but still want some degree of return on your money.

Cash: Cash is relatively risk-free, but doesn’t offer any upside so it should only be used for short term needs.

Retirement Requires a Shift in How You Allocate Assets

To paraphrase Mr. Bond, “You only live twice: Once when you are born and once when you…” retire.

When you approach retirement, your asset allocation goals shift significantly — it’s a whole new life and experience for you and your money.

  • You have spent the first part of your life accumulating and growing assets.
  • In retirement, most people need to shift to creating income from those assets.

5 Steps to the Best Asset Allocation Strategy

In general, there are 5 basic steps to arriving at an asset allocation strategy tailored to you and your needs in retirement:

  1. Determine how much you need and want to spend in what time periods.  The more accurate you are, the better.  Here are 9 Tips for Predicting Your Retirement Expenses.
  2. Figure out how much reliable income you will have from sources other than savings.
  3. Next you need to calculate the difference between what you need to spend and your reliable income. You should also think about the difference between what you want to spend and your reliable income. (Wants are things that you could forego if necessary.)  The NewRetirement retirement planning calculator can help you with this analysis.
  4. Assess whether you have additional goals for your money.
  5. Once you know how much income you’ll need (and want) from your savings in any given year and you have determined any additional goals, then you can figure out how to best allocate assets to make sure the money is available when you need it.

Money that you need right away should be in cash.  Money that you’ll want within the next few years might be held in bonds.  And money that you might tap in 10 plus years could possibly be in mutual funds or perhaps stocks.  Assets that are earmarked for leaving a legacy could possibly be in the riskiest types of investments — depending on your risk tolerance.

Learn more about How to Build a Retirement Income Plan.

A Bucket Strategy is Another Way to Determine Optimal Asset Allocation

One method for balancing the desire for growth with the need for stability is a retirement bucket strategy.  With this approach you establish different “buckets” or accounts for different types of spending.

  • Invest some buckets with more risk in the hopes of more reward — for example, in stocks or mutual funds.
  • Invest other buckets conservatively — in cash or bonds, depending on your time horizon.

Explore 3 Common Ways to Set Up a Retirement Bucket Strategy

How Do You Maintain an Asset Allocation Strategy?

Mr. Bond once said, “I don’t stop when I’m tired. I stop when I’m done.”  This quote could easily be applied to the task of maintaining your asset allocation strategy.  It is not enough to set it up once and think that you are done.

You must figure out how to maintain and evolve your strategy through to the end.

The most common way to maintain your asset allocation strategy is to periodically rebalance your portfolio back to your target asset allocation.  So if you decided that your ideal asset allocation is: 45% stocks or mutual funds, 40% bonds and 15% cash, then — assuming that you withdrew funds and that the various assets got varying rates of return — you would need to buy and sell in and out of your various positions to return to those ratios.

This is the most basic way of maintaining asset allocation.  However, there are other ways of determining and managing asset allocation: constant-weighting, tactical asset allocation, dynamic asset allocation, insured asset allocation, integrated asset allocation and more…

Do You Need an “M,” “Q,” or a Miss MoneyPenny to Help Determine or Maintain Your Best Asset Allocation Strategy?

This article attempts to simplify the thinking around determining the best asset allocation strategy.  However, the reality is that it can get pretty complicated.

  • There are a lot more options for investing money than just stocks, bonds and cash.
  • Not everyone wants to invest their time investing their money.
  • It can be hard to make very rational decisions about money.
  • Determining the best strategy and maintaining that strategy can be hugely cumbersome.

James Bond could not do all that he does without a team of people behind him — gadgets from “Q,” guidance and training from “M.”

It is likely that you too could potentially benefit from some professional guidance if you want to feel truly confident about your retirement investments.  In fact, according to data from the Insured Retirement Institute (IRI), the percentage of Boomers working with a financial advisor who are highly confident in having sufficient savings to live comfortably throughout their retirement years is more than twice that of Boomers who are planning for retirement on their own.

Try a free consultation with an advisor from NewRetirement.

Find out how much you should save, and how to best invest, for life and retirement




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