Wednesday, 16 September 2020

You probably know that when it comes to saving for retirement, you can never start too early. 

But simply depositing money into an account isn't enough.  The key to growing your retirement portfolio lies in having a sound asset-allocation strategy, with the right balance of stocks, bonds, and other relatively safe investments.

An asset allocation that made sense in your late 20s may become too risky when you're in your late 50s and retirement looms. Adjusting your portfolio holdings as you get older can help you pursue more modest growth, while seeking to preserve your dollars for when you'll need them most.

But what is the "right" asset allocation? While it depends on your individual financial situation, risk tolerance, market conditions, and other savings goals, there are a few guidelines.

Balancing growth with risk

The rule of thumb used to be that investors should subtract their age from 100 to determine what percentage of your portfolio should be stocks, and what should be invested in fixed income securities such as bonds and money market securities. So a 35-year-old woman might have between 65 percent and 85 percent of her portfolio in stocks or stock funds, with that allocation decreasing as she aged.

However, because people are living longer and thus need more money in their retirement accounts, advisors and industry experts have since revised that allocation guideline. Many now suggest that you subtract your age from 110 or even 120  in order to maintain a more aggressive stock position in your portfolio for longer.

But the general idea remains the same. You want to maximize your opportunity for earnings when you're young, and then decrease your risk as you move toward retirement. Since the 1920s, stocks historically have provided big returns, offering an annual average returns of about 10 percent. Bonds provide stable earnings,  averaging around 5 percent during the same period. Those returns, however, can and do fluctuate. During the world financial crisis of 2008 and 2009, markets plummeted. The S&P 500 lost 39 percent in 2008 alone.

Changing allocations

One of the best approaches is to diversify your portfolio by shifting the balance from stocks to bonds as you age. Here's a look at how your portfolio might evolve as you move toward retirement:

In your 20s and 30s

With decades until you retire, you may consider taking on a bit more risk, since younger investors have a longer time to recoup any losses. That usually means allocating the majority of your retirement portfolio toward stocks or mutual funds. An asset allocation calculator can help you determine an investment mix that's appropriate for your age, risk tolerance, and goals. But there's no right answer. Some advisors suggest allocating at least  75 percent of your portfolio to stocks if you're more than 20 years from retirement.

In your 40s and 50s

At this point, you still want growth from stocks, but it's wise to reduce risks to your nest egg with retirement getting closer. Some experts recommend taking advantage of dividend-producing stocks, which offer both growth and income to your portfolio. Adding more bonds and other fixed income investments to your portfolio can also provide steady income. At this time, stocks might comprise about 60 percent of your retirement investments.

In your 60s and 70s

If you're retiring within the next five years, it's time to adjust your strategy again. You'll likely begin withdrawing some of your saved funds, and moving more of your investments into bonds. But since many people are living into their 80s and even beyond, you'll probably need your retirement to last a few decades, and stocks will need to play some role in generating income. You might maintain an allocation of 40 percent to 50 percent stocks while you're in your 70s, and up to 30 percent in your 80s.

Paying attention to  how much you stash away for retirement is important. But being careful about how you invest those savings over time is just as important—so you'll be prepared when retirement comes.

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