Asset allocation serves as a useful retirement planning tool to help you manage market uncertainty, build resilience in your investments, and respond to changing financial goals.
Quick takeaways
You’re saving and investing consistently for retirement. But is your investment strategy the right one to help you achieve your goal? Knowing more about your investment mix, otherwise known as asset allocation, can help you decide. Here are some strategies for finding the right asset allocation for your goals.
Asset allocation is simply your investment mix within your portfolio. That investment mix is the percentage of money you decide to put into different types of assets, such as stocks, bonds, or cash.
Your asset allocation can range from conservative (lower risk) to aggressive (higher risk) based on your risk tolerance and when you plan to retire. For example, if you want to retire in 20 years—a longer timeline—you might choose a more aggressive asset allocation than someone who is retiring in the next three to five years. Why? You have more years to weather (and recover from) short-term market swings.
Asset allocation is not a “one and done” strategy. It changes: As you move closer to your retirement goal, you’ll have to align both your risk tolerance and timeline.
Historically, many people have relied on what’s known as the “Rule of 100.” It’s a simple guideline: Subtract your age from 100 to help you decide the percentage of your portfolio that you should invest in stocks. Any remaining percentage could be invested in bonds. So, for illustration if you’re 40 years old, 60% of your retirement portfolio would be invested in stocks, while 40% would be in bonds.
As lifespans have increased, that calculation has evolved to either the “Rule of 110 or 120.” It works in the same way: Subtract your age from 110 (a more conservative allocation) or 120 (a more aggressive allocation) to decide your retirement portfolio’s stock and bond distribution.
Here’s what asset allocation looks like for each decade using this rule.
| Age | Percentage of stocks | Percentage of bonds |
|---|---|---|
| 20 | 90-100% | 0-10% |
| 30 | 80-90% | 10-20% |
| 40 | 70-80% | 20-30% |
| 50 | 60-70% | 30-40% |
| 60 | 50-60% | 40-50% |
Rules of thumb don’t factor in your specific financial situation and retirement goals. There are three important factors that affect how you personalize your asset allocation strategy:
How much will you need in retirement? Will your income needs stay the same or change? What guaranteed income streams (think Social Security, annuities, or a pension plan) will you have outside of traditional retirement accounts? Understanding both what your retirement expenses will be and the income you may have can help you decide where to allocate your retirement portfolio.
When do you want to retire? The longer you have to save for retirement, the more able you might be to take on higher risk in the hopes of future growth. As you get closer to your goal, adjusting your investment mix can help lower your risk.
The goal of investing is not to take action just because the market changes—pulling out when it drops, jumping back in when it’s growing. Your risk level should help you balance both potential future growth and short-term market anxiety so you can feel more confident and secure in your strategy.
If you’re looking for a simple solution to managing your asset allocation over time, you might consider investing in a target date fund or professional management of your portfolio. Here’s what that looks like:
Invest in a target date fund: These types of funds (named and based on the year you want to retire) work to automatically reduce risk over time by shifting your portfolio’s asset allocation. They also eliminate the need for regular rebalancing.
Professional management with digital advice: If you’re looking for professional management, you might consider portfolio management through digital advice (often referred to as a robo-advisor). These automated digital platforms make ongoing investment decisions for you using algorithms based on your stated goals and risk preference.
Professional management with managed accounts: If you’re looking for more customized investment management options, there are managed accounts. These are overseen by professional investment managers who make decisions based on your unique goals and situation.
Whatever your asset allocation strategy, it’s a good idea to check in on your investment strategy at regular intervals throughout the year and make adjustments as needed based on your financial situation. Reviewing your retirement asset allocation twice a year—during your mid-year and year-end financial check-ins—can help ensure that investment strategy still aligns with your goals. Talking with a financial advisor can also help you feel more confident about your overall plan.
Log in to your Principal account to see investment services available to help you manage your asset allocation goals.
