Assess your retirement asset allocation

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A version of this article was previously published on January 25, 2021.

Like so many other aspects of investing, precision to the right asset allocation – the combination of stocks and bonds that offers the highest possible return with the least risk over a given period – will only be apparent with hindsight.

Instead, investors should rely on market history and a sober view of the valuations of different asset classes to guide their allocations. They can then fine-tune their allocations based on individual-specific factors and monitor the asset mix of the portfolio as they get closer to needing their money.

If you’re setting your portfolio’s asset allocations for the first time or looking for a ‘reasonableness check’ of your existing asset mix, here are some key steps to follow.

Step 1: Get outside advice.
The gold standard for establishing an asset allocation is to employ a financial advisor who can recommend an appropriate mix of assets given your own circumstances: your proximity to retirement, your situation with your retirement savings, and your own comfort level with volatility, among other factors. But if you don’t have an advisor or want to support an advisor’s recommendations, there are additional resources to help guide you through asset allocation.

Morningstar Lifetime Allocation Indices, informed by research from Morningstar’s investment management team, offer another perspective on the issue of asset allocation. In addition to providing distinct asset allocations for different time horizons, the indices also allow for customization by risk profile for each age bracket: conservative, moderate and aggressive. The indices also show under-allocations to various asset classes – for example, they include percentage weightings in inflation-protected Treasuries and emerging market stocks.

Target maturity funds, which are designed as unique investments tailored to a given retirement date, can provide additional professional insight into appropriate asset allocations given different time horizons before retirement. It’s worth taking a look at the target date offerings of a few different fund companies – funds for the same retirement date can vary widely depending on glide path philosophy and security types.

Some target date programs maintain very high equity allocations before and even during retirement, a position based on the idea that longevity risk – that is, the likelihood that you will outlive your assets – should outweigh concerns about short-term fluctuations in an investor’s principal. Others maintain more conservative allocations; if a fund limits volatility, it is thought, investors are more likely to stick with the program in good and bad markets.

Sampling a range of target date fund opinions for investors in your same age bracket can help you get in the right ballpark; Morningstar analyst favorite series include BlackRock LifePath Index, Pimco RealPath Blend, JP Morgan SmartRetirement Blend T. Rowe Price Retirement and MassMutual Select TRP Retirement.

Step 2: Customize according to your own situation.
While out-of-the-box asset allocation guidance, such as Morningstar’s Lifetime Allocation Indices and Target Date Vehicles, can help you assess your own retirement and pre-retirement asset allocation , these are just a few of the many sources of information. you can look to when defining your stock/bond/cash mix. Online retirement calculators can also be helpful. Whether you use a financial advisor or manage your own investment portfolio, it’s essential to consider your personal circumstances to arrive at an asset allocation framework that truly suits your needs. Factors that could affect your asset mix in retirement and before retirement include your desire to leave a legacy, other sources of income you can count on in retirement, the longevity of your own family , your savings rate and the size of your retirement portfolio.

Here are some other questions to consider when calibrating your own asset allocation:

Are you considering other sources of income during retirement, such as a pension?
Yes: More actions
No: fewer actions

Does longevity run in your family?
Yes: More actions
No: fewer actions

Do you expect to need a fairly high level of income during retirement?
Yes: More actions
No: fewer actions

Have you ever accumulated a big nest egg?
Yes: fewer actions
No: No more actions

Is your savings rate high?
Yes: fewer actions
No: No more actions

Is there a chance you need to leverage your assets for another purpose before retirement?
Yes: fewer actions
No: No more actions

Do you want to bequeath a legacy to your children or other loved ones?
Yes: More actions
No: fewer actions

If you are still working, do you have a very stable career with little risk of income disruption?
Yes: More actions
No: fewer actions

Step 3: Keep it up to date.
Once you’ve set your asset allocation, it’s important to periodically review your portfolio’s actual asset allocation to ensure it’s still on track. It is certain that some parts of your portfolio will perform better than others; periodic rebalancing towards your goals – both on an asset class and intra-asset class basis – can help reduce your portfolio volatility. Morningstar’s Instant X-Ray — or the X-Ray feature available in Portfolio Manager — can help you keep tabs on your portfolio’s asset allocation. Periodically harvesting winning portions of your portfolio controls risk while providing cash you can use for day-to-day expenses in years to come.

Additionally, you will need to review your own target mix of stocks/bonds/cash over the years. For most investors, getting closer to their target dates will require a more conservative asset mix; as they get closer to spending what they have saved, they cannot risk large fluctuations in the value of their savings. This is why most glide paths for accumulators feature higher allocations to bonds and cash as retirement approaches. I’ve written extensively about the Bucket Approach to Retirement Portfolio Allocation, which helps you get back to an asset allocation for retirement that takes your spending rate into account. I like the idea of ​​customizing the asset allocation of your retirement portfolio based on your own spending plan.

Individual circumstances may also change, so higher or lower allocations to various asset classes may be appropriate. For example, investors who find themselves well ahead of their savings goals due to strong market performance over the past nine years may want to reduce their equity allocations. Along the same lines, investors worried about layoffs in their industry would do well to reduce their stock allocations — especially in their easily accessible taxable accounts — in case they need to dip into their savings prematurely. of retirement.

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