One of the things that can change in retirement is a person’s asset allocation. 

Asset allocation is a strategy that spreads your investments across different “asset classes.” The three main classes are equities (stocks), fixed income (bonds), and cash. There are other classes, of course, like commodities and real estate.

The thinking behind asset allocation is that by mixing your investments amongst these different classes, you take on less risk. That’s because if one class goes down in value, the other classes may not be affected.

Many people, when they begin saving for retirement, adopt a relatively aggressive form of allocation by investing more heavily in stocks than other assets.  Stocks have historically risen higher in value than, say, bonds, so they tend to be a good option for building your nest egg. 

But stocks also tend to be more volatile than other assets.  While the stock market does tend to rise over time, it can experience major dips and swings that can last for months, and which can take years to recover from.  That’s why many investors adopt an increasingly conservative asset allocation as they get older.  This means gradually allocating a greater portion of your portfolio to less volatile assets — most commonly fixed income — as you get closer to retirement.  The thinking is that by doing this, your retirement savings will be less exposed to extreme volatility, decreasing the risk of a major loss in principle just when you need your principle most.  (i.e. in retirement, when you will no longer be living off the income of a regular paycheck.) 

But there’s no one-size-fits-all approach to investing, which is why it’s critical that you take a close look at your own asset allocation in retirement.  Do changes need to be made?  Do you need to be more conservative…or are you too conservative already?  There are several factors to consider, for instance: 

• Do you need to focus more on drawing regular income from your investments in order to meet your daily living expenses?
• Do you need to focus mainly on preserving your principle so you don’t outlive your money?
• Do you have important goals in retirement for which you still need to grow your money in order to achieve?

The answers to these questions will help determine what your asset allocation should be in retirement – and how long that allocation should last before changing again.  So, if you ever need help answering these questions, or in applying the answers to your investment strategy, please don’t hesitate to reach out.  I would be happy to answer any questions or address any concerns you may have.