The Role of Stocks and Bonds in a Retirement Portfolio

A middle aged couple making decisions about stocks and bonds in retirement

When building a retirement investment portfolio, many people focus on investing heavily in stocks and including some bonds. But what happens when you reach retirement? Once it’s time to actually live off your portfolio, your approach to investing might change. Understanding stocks and bonds in retirement and what makes sense for your risk tolerance is important. 

Deciding on Your Mix of Stocks and Bonds in Retirement 

When building your nest egg as a young person, you’re likely focused on long-term growth, according to Stacy Johnson, CFP, a former investment advisor and founder of the financial education website Money Talks News.  

“Getting older and shifting into retirement mode tends to make you more risk-averse,” Johnson says. “When you’re 30 and make a mistake or the stock market falls, you have time to recover. You can’t replace that money when you’re older.” 

As a result, it’s natural to want to move your money into assets considered safer, like bonds and CDs. However, putting everything into non-stock assets might not be the best move. 

“While you might shift a portion of your portfolio to more stable income-producing assets as you approach retirement, that doesn’t mean 100% of your investment portfolio should be in bonds,” says Kevin Matthews II, a former financial advisor and the author of Starting Point: How to Create Wealth That Lasts. “It still makes sense to hold a portion of your money in stocks to allow your portfolio to continue to grow moderately and outpace inflation.” 

Does the “100 Minus Your Age” Rule of Thumb Still Work? 

When figuring out how much of your retirement portfolio should remain in stocks, experts have long recommended subtracting your age from 100 to decide how much of your portfolio should be dedicated to stocks. For example, if you’re 65, you’d keep 35% of your portfolio in stocks using this rule. Variations on this rule have been used over time, especially as longevity becomes an issue. Some experts talk about using 110 or 120 minus your age. 

“I’ve never been a fan of this rule,” says Ashton Lawrence, CFP, ChFC, AIF, a partner at Goldfinch Wealth Management. “This can be a useful starting point, but it doesn’t take into account an individual’s specific circumstances or risk tolerance.” 

On top of that, Lawrence points out; it doesn’t provide insight into planning for unexpected longevity, tax consequences, or legacy goals. He also suggests that stocks and bonds in retirement aren’t your only choices for asset allocation. Lawrence says it’s possible to include assets like real estate that can add diversity and cash flow depending on your goals. 

Don’t Forget About Tax Planning 

Too many retirees don’t think about the tax consequences of their portfolios, Matthews points out.  

“When you’re making changes to your allocation, pay attention to tax consequences,” Matthews says. “You may have a tax bill depending on the account you’re using or whether your rebalancing results in a distribution.” 

As your retirement progresses, you might also need to consider the tax impact of required minimum distributions (RMDs) and how to minimize the impact. Moves like a Roth conversion can help you avoid RMDs and tax payments later, but you might need to plan your conversion to manage what you pay in taxes today.  

Create a Distribution Strategy 

When considering stocks and bonds in retirement, you also need to think about your distribution strategy, Lawrence points out. 

You need to coordinate which assets you sell based on your Social Security benefits, which type of account the funds are coming from, and your current portfolio makeup.  

One such strategy, Lawrence says, is the bucket strategy. With the bucket approach, you divide your assets based on whether you need them in the short-term, medium-term, or long-term. Short-term assets can include the cash you need in the next two or three years or short-term bond funds. Medium-term assets can include dividend stocks, bonds, and other relatively stable and income-producing assets. That long-term bucket is money you won’t need for at least seven years and might be appropriate to remain in stocks and growth ETFs. 

Make a Plan That Suits You 

Rather than relying on rules of thumb and limiting yourself only to stocks and bonds in retirement, Lawrence suggests working with a financial professional to create a customized plan that considers how to meet your circumstances based on asset allocation, tax strategy, and distribution sequence.  

“Retirees should approach investing invest balance their lifestyle preference in retirement with the need to make their money last,” Lawrence says. “Consider diversifying a retirement portfolio across different asset classes and using various strategies to manage risk and provide income streams.” 

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