Rebalancing for Your 70s: The Shift Towards Preservation
As you enter your 70s, your investment focus typically moves from accumulation to distribution. The primary goal is no longer rapid growth, but rather capital preservation and generating a reliable income stream to fund your lifestyle without prematurely depleting your savings. This requires a thoughtful approach to asset allocation, which is the process of dividing your investments among different asset classes, such as stocks, bonds, and cash, to balance risk and reward. Your portfolio mix should be a direct reflection of your financial goals, risk tolerance, and time horizon.
The 'Rules of Thumb' Re-examined for Retirees
For decades, rules of thumb like the '100 minus your age' guideline suggested a heavily conservative approach for retirees. However, with rising life expectancies and inflation, this approach is often too conservative and could leave a retiree vulnerable to outliving their savings. More modern guidelines, such as the '110 minus your age' or '120 minus your age' rules, provide a starting point for a more growth-oriented portfolio, acknowledging the need to keep pace with inflation. For example, the '110 minus age' rule suggests a 70-year-old could hold 40% in stocks and 60% in bonds/cash. The '120 minus age' rule would suggest 50% stocks and 50% safer investments. However, these are just starting points. A personalized approach based on your unique circumstances is far more effective.
Building Your Moderate to Conservative Portfolio
A solid asset allocation for a 70-year-old will likely be skewed toward fixed-income and cash equivalents to provide stability and income. A moderately conservative allocation might look something like this:
- 40-50% Stocks (Equities): While the riskier component, stocks offer the potential for long-term growth needed to combat inflation. This allocation should focus on stable, large-capitalization stocks and dividend-paying stocks that can provide a consistent income stream.
- 50-60% Fixed Income (Bonds): This portion of the portfolio provides a more stable, predictable income stream. Options include U.S. Treasury securities, high-quality corporate bonds, and bond funds. For managing interest rate risk, some retirees use a bond laddering strategy.
- 5-15% Cash/Cash Equivalents: Holding a liquid cash reserve is crucial for covering immediate expenses and avoiding selling investments during market downturns. A cash bucket should ideally cover 1-3 years of living expenses not covered by other income sources.
Implementing the 'Bucket Strategy'
For many retirees, the "bucket strategy" offers a practical way to manage retirement income and market volatility. This strategy segments your portfolio based on your spending timeline, creating distinct buckets with different investment horizons:
- Bucket 1 (1-3 years): Cash and cash equivalents (e.g., money market funds, CDs) for immediate living expenses. This provides stability and ensures you don't need to sell other assets during a market dip.
- Bucket 2 (3-10 years): Moderately conservative investments (e.g., intermediate bonds, dividend stocks) for medium-term needs. This bucket provides income and a buffer for future expenses.
- Bucket 3 (10+ years): Growth-oriented investments (e.g., stocks, stock funds) for long-term growth to fight inflation. This bucket is for expenses further out and has more time to recover from market fluctuations.
The Importance of Regular Rebalancing
As you live in retirement, your asset allocation will drift over time due to varying asset class performance. For example, a strong stock market run could make your equity portion grow larger than your target allocation. Regular rebalancing, typically annually, is necessary to bring your portfolio back in line with your desired risk level. This involves selling some of the assets that have performed well and buying more of those that have underperformed, which is counterintuitive but helps maintain your strategy and manage risk.
Comparison of Common Asset Allocation Approaches for Retirees
| Feature | 100 Minus Age Rule | 120 Minus Age Rule | Bucket Strategy |
|---|---|---|---|
| Example Allocation (70 y.o.) | 30% Stocks / 70% Bonds | 50% Stocks / 50% Bonds | Depends on individual needs, uses multiple time horizons |
| Main Goal | Maximum Capital Preservation | Balanced Growth & Income | Fund near-term needs while preserving long-term growth |
| Inflation Risk | Higher risk of losing purchasing power | Lower risk, aims to beat inflation | Manages risk across different time horizons |
| Ease of Management | Simple, but potentially outdated | Simple, more modern guideline | More complex, requires active management |
| Primary Benefit | Minimal market volatility | Better chance to outpace inflation | Reduced sequence-of-returns risk |
| Drawback | Can be too conservative | Riskier than the 100-age rule | Requires more attention and management |
Other Factors Influencing Your Allocation
Beyond basic rules and strategies, a 70-year-old's asset allocation must be informed by several personal factors:
- Other Income Sources: Consider all sources of retirement income, such as Social Security, pensions, and annuities. If these sources cover a significant portion of your living expenses, you may be able to afford a slightly more aggressive allocation in your investment portfolio for growth.
- Health and Longevity: Your health and family history can influence your expected longevity. If you expect a long retirement, a more balanced approach that incorporates growth is prudent. Long-term care insurance can also be a key part of your financial plan to protect your savings from potentially massive healthcare costs.
- Risk Tolerance: Your emotional capacity to handle market swings is critical. No matter what a formula suggests, your portfolio should allow you to sleep soundly at night. If a downturn would cause too much stress, a more conservative approach is appropriate.
- Legacy Goals: If leaving a legacy is a priority, your investment strategy may need to be different than if your goal is solely to fund your own retirement.
Final Thoughts and Professional Guidance
While this article provides a comprehensive overview, there is no one-size-fits-all answer to what is a good asset allocation for a 70-year-old. The right strategy is deeply personal and should be a balance of capital preservation, inflation protection, and generating a reliable income stream. Given the complexities of retirement planning, seeking guidance from a qualified financial advisor is highly recommended. A professional can help you navigate these factors and build a personalized plan. For further reading, an excellent resource on broad financial planning topics can be found on the FINRA website.
Conclusion
In your 70s, the ideal asset allocation is not a fixed number but a dynamic strategy focused on protecting your accumulated wealth while providing sufficient income. A common starting point is a moderately conservative mix, possibly 40-50% in equities and 50-60% in fixed income, but this should be customized based on your total financial picture, health, and personal risk tolerance. By building a cash buffer, diversifying your assets, and regularly rebalancing, you can manage market risks and ensure your financial security for a long and healthy retirement.
