Asset allocation is the cornerstone of any long-term investment plan.
But when it comes to retirement planning, it becomes more than just a spreadsheet exercise—it’s a strategy that balances risk, income, and longevity.
Whether you’re ten years away from retirement or already drawing down your portfolio, asset allocation shapes everything: how much risk you take, how much income you can safely generate, and how well your capital endures across decades of market cycles.
Let’s explore how asset allocation works in the context of retirement planning—and how to tailor it for the years before and after you stop working.
Contents
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- Why Asset Allocation Matters More in Retirement
- The Traditional 60/40 Portfolio: Still Relevant?
- Age-Based Allocation Rules: Starting Point, Not Gospel
- Bucketing Strategies: Managing Sequence Risk
- Incorporating Alternatives
- Adjusting Allocation Over Time
- The Role of Income-Producing Assets
- Customizing for Tax Efficiency
- Final Thoughts
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Why Asset Allocation Matters More in Retirement
Investment mistakes can be corrected with time and income during your working years.
In retirement, the margin for error shrinks.
Once you stop working, the sequence of returns risk becomes critical.
If you experience poor market performance early in retirement while also making withdrawals, your portfolio may not recover, even if long-term average returns look fine on paper.
Asset allocation is your first line of defense.
The right mix of equities, fixed income, and alternative assets helps reduce volatility, cushion drawdowns, and ensure your retirement income strategy remains intact.
The Traditional 60/40 Portfolio: Still Relevant?
The classic 60/40 portfolio—60% equities and 40% bonds—has been a staple of retirement investing for decades.
The idea is simple: combine stocks’ growth potential with bonds’ income and stability.
But in a world of low interest rates, rising inflation, and volatile equity markets, some question whether the 60/40 model still works.
While it may not be optimal for everyone, it remains a reasonable baseline.
How the portfolio is implemented is more important than the headline numbers.
For example:
- The 60% equity sleeve can include domestic, international, large-cap, small-cap, and dividend-paying stocks.
- The 40% bond portion may be diversified across duration credit quality, including TIPS (Treasury Inflation-Protected Securities).
Ultimately, 60/40 isn’t dead—but it may need nuance.
Age-Based Allocation Rules: Starting Point, Not Gospel
One popular guideline is the “100 minus your age” rule: subtract your age from 100, and that’s how much of your portfolio should be in stocks.
A 65-year-old would, therefore, allocate 35% to equities, with the rest in bonds or cash.
This rule has evolved.
Some now suggest “110 minus age” or even “120 minus age,” given increased longevity and the need for higher returns to support 30+ years of retirement.
These rules are decent starting points. But they ignore personal context:
- Are you retiring early or late?
- Do you have a defined benefit pension?
- What are your essential vs. discretionary spending needs?
- How comfortable are you with market volatility?
Rather than follow a rigid formula, build your allocation around your retirement income needs, time horizon, and risk tolerance.
Bucketing Strategies: Managing Sequence Risk
Many retirees use a bucket strategy to manage both market volatility and withdrawal needs. This approach segments the portfolio into different time horizons, each with a different asset allocation.
Typical setup:
- Bucket 1 (0–2 years): Cash or near-cash instruments. This covers near-term income needs with no market risk.
- Bucket 2 (3–7 years): Short- to intermediate-term bonds. Slightly higher yield, still relatively stable.
- Bucket 3 (8+ years): Growth-oriented assets like equities and real estate.
The idea is that you always have short-term liquidity, medium-term stability, and long-term growth potential.
In a bear market, you’re not forced to sell stocks to generate cash.
Instead, you draw from buckets 1 and 2, giving the bucket 3 times to recover.
Incorporating Alternatives
Alternative assets—such as real estate, infrastructure, private credit, and commodities—can play a role in retirement portfolios, especially as a diversifier.
- REITs offer income and inflation protection, though they come with equity-like volatility.
- Private credit and infrastructure funds may provide income streams with a lower correlation to public markets.
- Gold and commodities can hedge inflation, but they don’t generate income.
For most investors, alternatives should remain a minority allocation—perhaps 10–20%—unless you have significant wealth or access to institutional-grade products.
Adjusting Allocation Over Time
Asset allocation should evolve over your retirement lifespan.
But this doesn’t mean you have to become ultra-conservative the moment you retire.
In fact, too much in bonds or cash early in retirement may increase longevity risk—the risk that you’ll outlive your assets due to insufficient growth.
A more dynamic approach:
- Early retirement (ages 60–70): Maintain a growth tilt (50–65% equities) to support a 30-year horizon.
- Mid retirement (ages 70–80): Gradually rebalance toward income and stability.
- Late retirement (80+): Focus on simplicity, liquidity, and capital preservation—though some growth exposure may still be warranted.
The key is to review your plan annually and adjust based on changes to your spending, market conditions, and health status.
The Role of Income-Producing Assets
While growth remains important, reliable income is the backbone of a retirement portfolio.
Sources might include:
- Dividend-paying stocks
- Investment-grade bonds and bond ladders
- Annuities (in some cases)
- Covered call strategies or conservative option overlays
But chasing yield can backfire.
High-yield assets often carry elevated credit or interest rate risk.
Focus instead on sustainable income, not just high distributions.
Insurance) and use growth assets to fund discretionary spending or legacy goals.
Customizing for Tax Efficiency
Asset allocation isn’t just about what you own—it’s also about where you own it.
Taxable accounts, IRAs, and Roth IRAs each have different tax characteristics.
Aligning your asset mix with the right account type can improve after-tax returns.
- Hold bonds and REITs in tax-deferred accounts to shelter ordinary income.
- Place stocks and ETFs in taxable accounts to benefit from capital gains treatment.
- Use Roth IRAs for growth-oriented investments that you want to grow tax-free.
This is known as asset location—and it’s often overlooked but can add significant value over time.
Final Thoughts
Asset allocation is not static.
It’s an evolving strategy that needs to adjust to your age, risk tolerance, income needs, tax situation, and market conditions.
In retirement, the stakes are higher—but so are the tools at your disposal.
Whether using a bucket strategy, tilting toward dividend stocks, or layering alternative strategies, the goal is to preserve capital, generate income, and maintain flexibility.
A well-structured asset allocation plan won’t eliminate risk but will give you a roadmap to navigate it.
And when the market gets turbulent—as it inevitably will—it’s that roadmap that helps you stay the course.
We hope you enjoyed this article on asset allocation for retirement planning.
If you have any questions, send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
