4 Critical Questions – Know How to Keep Your Retirement Money Safer

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In my previous piece, I covered the importance (albeit unpleasantness) of good retirement planning, the 7 risks you face, the ideal (but impractical) solution, and offered a more practical approach.

That approach requires investing in higher-risk/higher-reward assets like stocks.

Unfortunately, such an approach requires you to face and mitigate market and sequence-of-return risks. A major part of how to address those has to do with figuring out your right stock allocation as you approach retirement.

Here’s your guide to figuring this out…

How to Address Market and Sequence Risks with a Retirement Portfolio Partly in Stocks

The short answer is what was already alluded to above. Maintaining proper asset allocation as you approach retirement, enter it, and live through it.

OptimizedPortfolio.com has an excellent primer on asset allocation. Some highlights from that primer are:

  • Asset allocation means how you subdivide your portfolio between different types of investments (e.g., stocks, bonds, cash, real estate, etc.).
  • Research shows asset allocation is responsible for far more of a portfolio’s returns, and its volatility, than which specific investments you choose (e.g., which specific mutual fund, stock, or bond).
  • Some assets classes are riskier than others, which usually corresponds to higher expected returns. Mixing assets that don’t correlate (i.e., when one zigs, the other zags) reduces your volatility faster than it reduces your expected returns.
  • There are various simple formulas for a stock allocation as a function of age, some more conservative and others more aggressive.
  • It’s impossible to define a single “ideal” asset allocation, except in hindsight. The best you can shoot for is the optimal asset allocation for you personally, which will change over time.

What Determines Your Ideal Asset Allocation?

There are 4 crucial questions to ask that will help you decide your stock allocation:

  1. What is your risk tolerance? As mentioned above, if losing 20–50% of your portfolio in a given year (recall that bear markets, i.e. >20%, losses happen about every 3.6 years on average, with >30% losses every 5.5 years) would see you head for the hills, locking in your losses, you shouldn’t be heavily invested in stocks.
  2. What is your time horizon? Making back bear-market losses usually takes many months or even years. This implies that money you’ll need in the next few years probably shouldn’t be invested in stocks.
  3. How much growth do you need? If you already have so much money that you could cover your expenses from a 0%-stock portfolio essentially forever, you don’t need to invest in stocks (though you may still want to overweight stocks if you want to build multi-generational wealth for your family — and you wouldn’t be worried about a 50% loss because you have so much money in the first place that you could easily make back all your losses before they’d be locked in).
  4. How flexible is your budget? If most of your spending is fixed, a crash early in your retirement (if you hold most of your portfolio in stocks) would cripple your plan, as you need to cover your spending by selling stocks at exactly the worst time, when their prices are low. On the other hand, if most of your spending is discretionary, you can cut back when the market craters, reducing or eliminating such forced loss-selling.

The Problem with Accepted Age-Based Allocation Formulas

As the above-mentioned primer says, there are multiple age-based formulas for how much of your portfolio should be in stocks vs. bonds.

Here are three (of course, for any age that gives a negative number, use 0%, and when your answer is over 100%, use 100%):

  • Have in stocks a percentage equal to 100 minus your age (e.g., at age 65, you’d have 35% in stocks)
  • Have in stocks a percentage equal to 120 minus your age (e.g., at age 65, you’d have 55% in stocks)
  • Have in stocks a percentage equal to double the difference between 90 and your age (e.g., at age 65, you’d have 70% in stocks)

However, none of them make sense beyond a certain age.

For example, if you retired at age 65 and made it (with your $1.75 million portfolio intact) to age 90, does it really make sense to have 10%, 30%, or (especially) 0% in stocks, respectively?

According to the Social Security Administration’s actuarial tables, at age 90, Americans have a life expectancy of under 5 years. If you have a $1.75 million portfolio and need about $70,000 a year to complement your Social Security benefits, you don’t need any allocation to stocks, but there’s virtually zero risk that you’ll outlive your money even if it’s 100% in stocks!

Also, the first glide path (100 minus age) would struggle to provide the growth you need for decades in retirement, while the second and third expose you to high sequence risk.

Wade Pfau, professor of retirement income at the American College of Financial Services, suggests an opposite approach to solve this dilemma, “… you could have a low stock allocation early in retirement but increase it over time…”

While this approach reduces your sequence risk early in retirement, it does so at the cost of missing out on the more-likely appreciation you could gain from stock exposure during those years.

Whether you follow Pfau’s contrarian advice or not, he offers three other ways to combat sequence risk:

  • Spend less than you think you can, in good times and bad (Pfau believes that due to lower expected returns in the coming years and decades, the 4% rule now has about a 60–70% chance of working, compared to its near-certainty back in the 1990s; thus, he suggests reducing it to a “3% rule”)
  • When the market drops, reduce your spending as much as possible (e.g., that year don’t take an expensive vacation, don’t remodel your kitchen, reduce gifting, eat out less frequently, etc.)
  • Use buffers such as cash, a reverse mortgage, or whole life policy with cash value to cover expenses when the market suffers a downturn

The Bottom Line

Figuring out your stock allocation as you approach retirement is crucial, and not intuitive. You have to consider the 4 questions listed above.

Your answers will determine whether you should be more or less aggressive in your asset allocation.

And what’s right for you may be very different than what’s right for me. However, if you’d like to know my personal approach, I cover it in detail in my next piece.


This article is intended for informational purposes only, and should not be considered financial, investment, business, or legal advice. You should consult a relevant professional before making any major decisions.

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