The Simple Age Rule For Figuring Out How Much Retirees Should Have In Stocks

Your stock portfolio can be an interesting microcosm of not just your larger financial picture but also your outlook on the economy and marketplace on a much broader scale. The makeup of your stock holdings can tell a lot about how you envision the market's short term positioning, and this is especially true for investors who are nearing retirement or have reached it already. For one thing, many investors focus their attention in particular sectors of the stock market. FAANG stocks, for example, are a common place for technology-minded investors to park their capital. Depending on your outlook at any particular time, rebalancing your portfolio to lock in profits on companies and sectors that your research might suggests is heading for a looming shift can be a valuable approach.

However, there's more to investing than pumping cash into stock holdings. This is especially true in a retirement account like your 401(k) or Roth IRA. Diversification can go beyond deciding on a set of companies to invest in — especially when it comes to protecting the principal value of your retirement accounts. Blending different asset classes together is typically the best approach for most savers seeking to eventually quit the rat race. Alternative investments like bonds, real estate holdings (or REITs that perform a similar function), and more can help deliver a steady stream of growth while also defending your savings against a sudden downturn in the market. With volatility on the rise, principal defense is perhaps even more prudent. Common wisdom suggests a particular rule of thumb — centering on your age — in determining how much to keep in stocks. By subtracting your age from 100, you can calculate a great starting point in your portfolio management.

The desire to push funds out of stocks is one that's driven primarily by a changing appetite for risk. The older you become, the less instability your portfolio can generally handle. Sudden changes in the market can swing the value of your holdings dramatically, and in a phase of life where this investment is principally responsible for funding the majority of your lifestyle needs, a downturn in its total value can be devastating in both the short and long term. However, the market is a famously fickle ally (and sometimes enemy). It can be difficult to accurately read the tea leaves and make sense of how to best rebalance your portfolio and asset mix, especially with so much riding on the investment's performance and stability.

This is where your age can factor in. Younger investors with plenty of time to grow their holdings should target higher volatility plays that promise more risk, but higher return potential as well. However, as you get older, shifting out of stock holdings at a steadily increasing rate can be a good idea. One approach is to subtract your age from 100, with what you have left over representing the percentage of your portfolio that should be held in stocks. So a 60 year old will want to aim for roughly 40% of their investments in the stock market. The rest of your investment funds should then be directed toward more stable alternatives like the bond market.

As is always the case when exploring your investments, no singular rule can ever satisfy the needs of every individual investor. Making adjustments to support your unique circumstances is always a good idea, so this specific subtraction rule — in which you shed a sliver of your stock holdings each year in favor of safer alternatives — might be a good starting point, but there can be much more to consider. For instance, you may have a war chest of funds from phenomenally lucky stock picks — for example, if you invested $1,000 in Microsoft in 1986 when the company went public and then never touched your holdings, you'd have well over $4 million today — you might want a different approach. A saver in this position wouldn't realistically need to fret over minute portfolio rebalancing machinations. 

On the other hand, someone who started late in their investment journey will want to remain laser focused on good management fundamentals. Growing the principal remains a key goal, but the closer you get to retirement the less leeway you have in weathering short term storms that could see your value shrink. The pandemic era, and the on-again-off-again talks of tariffs, have both generated plenty of instability in the market in recent years. Other downturns, like the dot-com bubble, the housing market meltdown, and even short term flash crashes that have occurred throughout the years all similarly hold the potential to derail an overextended investor's long term goals. 

Regardless of your specifics, the general idea of moving into safer territory with age is a good one. While investors planning for retirement will want to watch their portfolios closely, once reaching retirement these investments become a primary source of financial stability. It's therefore even more important to defend the principal value of your holdings once hitting this milestone. Many investors will sell assets on a monthly or quarterly basis to draw funding out of their portfolio, while others might seek to siphon out dividend income before engaging in sales. For a retiree, every few years, rebalancing should also mean shifting some of your freed capital into safer harbors. Experts also recommend condensing your holdings in international stocks as you age. There's more to keep track of when spreading your portfolio broadly, so streamlining your assets can offer increased value to seniors as they enjoy their golden years.

Bonds, annuities, CDs, and even high-yield savings accounts will grow your money far slower than the potential returns offered by the stock market. However, the volatility of the market means that your drawdown strategy could be subject to unforeseen collapse, severely limiting your cash flow for months at a time or even stretching into years. Shifting into safer assets gives you flexibility when dealing with short term setbacks in the market. It's a trait that retirees need in their portfolios, and something that a heavily stock-dependent portfolio just can't match.