Retirement Portfolio Diversification Explained

I came across a recent article on proper retirement asset allocation strategies. The article quoted Morningstar’s personal finance expert Christine Benz. She recommended splitting your portfolio into three separate buckets, and not your typical asset classes you normally read about when researching retirement diversification strategies.

Instead this was about how to proportionately divide up your retirement account money to ensure a proper retirement landing. I’ve done extensive reading up on retirement allocation and overall retirement strategies and this was the first time I’ve read this advice.

1) Cash: 1-2 years’ worth of living expenses
2) Bonds: 5 years’ worth of living expenses
3) Stocks: remaining assets

Let’s pretend the Jones’ are 65 and retired. They saved really well and have $1 million saved for retirement. They can live on $80,000/annually, e.g. $80,000 would be one year of living expenses for them. In this scenario they would allocate $80,000 to cash (if not $160,000). They would then earmark $400,000 towards bonds (5 years of living expenses X $80,000). The remaining $520,000 of their retirement assets would then be allocated all towards equities/stocks to ensure the portfolio continues to grow and last for 25+ years to ensure the Jones’ have a long, happy retirement.

I’ve read this countless amounts of times that most certified financial planners recommend entering retirement with a 50/50 asset allocation (50% stocks and 50% bonds). The above scenario lays out that 50/50 breakdown a bit more clearly and explains why you would want that asset allocation. I like this recommendation, despite the fact that I believe my future “retired” asset allocation would be 60/40 (60% stocks and 40% bonds). So I would lean slightly more aggressive than this scenario, but still fairly close. With that said, if my portfolio is in a really good place and I’m looking more to preserve wealth versus “growth”, then I would probably be 50/50 or even 40/60 (40% stocks and 60% bonds).

Granted, the aforementioned is catered towards those nearing retirement. It doesn’t totally pertain to Millennial’s, which is who I am posting retirement and personal finance advice for. However, this advice struck me and was really interesting. I think it’s worth noting for anyone, regardless of age and stage of retirement. I believe it is good food for thought for Millennials.


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