How to Invest for Retirement: Asset Allocation

Corey —  September 16, 2009 — 2 Comments

       If you used the free retirement calculator I created, you should know how much you need to be saving for retirement. Your next step is to actually start investing for retirement. Before you do that though, you’ll want to determine your asset allocation – how your investments will be broken down among stocks and bonds.

       I have a simple rule to help you determine your broad asset allocation. Just take 120 and subtract your age to determine what percentage you should have in stocks. If you’re 25, you’ll want 95% in stocks. If you’re 45, you’d want 75% in stocks. And if you’re 65, you’d want 55% in stocks. Following the 120 minus your age guideline will keep your portfolio aggressive enough to grow while you’re young but safe enough to make it through bad years during retirement.

       Why not the 100 minus your age or the 110 minus your age rules? Because they’ll give you a retirement portfolio that won’t be able to support your withdrawals and keep up with inflation. If you were going to retire at 65, you’d only have 35% in stocks using the 100 minus your age rule (45% with the 110 rule). It’s also not aggressive enough to give you the growth you need while you’re young.

       Using the 120 minus your age rule will help you grow your money while you’re saving and beat inflation while you’re in retirement. But it also gives you a nice balance between risk and reward. Having 55% in stocks at age 65 isn’t too aggressive, but it’s enough to support your withdrawals and beat inflation while helping to protect you from bad markets.

       I’ll be posting an article soon about how to invest in a diversified portfolio through Vanguard, and this 120 minus your age guideline will influence how you invest. If you don’t want to use Vanguard, you can still use this rule in your other accounts. Sign up for free updates if you’re interested in learning how to invest in a diversified, low-cost portfolio!

Corey

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Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.

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