How Should I Invest My Retirement Savings?

Understanding Asset Allocation, Risk, and Reward Before and After Retirement

Investing for retirement is one of the most important financial decisions people make, yet it often feels complex and overwhelming. Markets move up and down, investment options seem endless, and opinions vary widely. Fortunately, you don’t need to predict the future or outsmart the market—you mainly need a plan that matches your time horizon, risk tolerance, and income needs.

At the heart of that plan is asset allocation—the mix of stocks, bonds, cash, and other assets you hold. This mix determines most of your long-term investment outcomes, including your expected return and how much volatility you experience along the way. The “right” allocation is personal, but there are well-established principles that can help guide your choice.

This article explains how to think about investing your retirement savings both during your working years and after you retire, including how to balance risk and reward as life circumstances change.

1. Why Asset Allocation Matters

Asset allocation defines how your money is divided among different asset classes:

• Stocks (equities): Higher long-term growth potential but greater short-term volatility.

• Bonds (fixed income): Lower risk and lower potential return, offering income and stability.

• Cash or cash equivalents: Very stable, but typically low return.

Over decades, stocks tend to outperform bonds, and bonds tend to outperform cash. But there is a trade-off: greater return potential comes with greater possibility of loss. Your asset allocation determines:

• How quickly your money may grow

• How much your account value may fluctuate

• How likely your portfolio is to withstand inflation

• How much income you can safely withdraw in retirement

Because retirement spans multiple decades, choosing the right allocation can significantly influence quality of life later on.

2. Asset Allocation During Your Working Years

Younger investors can generally take more risk

If you’re early in your career, time is your greatest financial advantage. Over 20, 30, or 40 years, short-term market declines—even severe ones—usually have time to recover. Historically, portfolios with a higher percentage of stocks deliver higher long-term returns, which helps your savings grow faster.

Typical allocation ranges for younger workers might look like:

• 80–100% stocks

• 0–20% bonds or cash

This does not mean investors should be reckless. It simply reflects that:

1. You have many years to recover from downturns.

2. Most of your retirement wealth will come from future contributions, not your initial balance.

3. Higher growth early on can significantly increase your long-term wealth.

Middle-aged investors might begin to moderate risk

As your balance grows, market downturns become more meaningful—and you have slightly less time to recover from them. Many investors gradually shift toward a more balanced allocation, such as:

• 60–80% stocks

• 20–40% bonds

You’re still focused on growth, but now protecting a larger portfolio becomes more important. This is where target date funds can be helpful—they automatically adjust your asset mix based on your retirement date.

Factors to consider during your working years

During your accumulation stage, your allocation should reflect:

• Your risk tolerance (How comfortable are you with volatility?)

• Your financial goals (Do you plan to retire early? Do you need high growth?)

• Your time horizon (How many years until retirement?)

• Your stability of income (Secure jobs may allow for higher equity exposure.)

No single formula fits everyone, but the rule of thumb is simple: the longer the time horizon, the more growth-oriented you can afford to be.

3. Asset Allocation as You Approach Retirement

The decade before retirement is often called the “retirement risk zone.” This is when you are most vulnerable to a major downturn—if a significant crash occurs right before or right after you retire, it can have long-lasting effects.

Why risk reduction becomes important

A 30% downturn at age 35 is unpleasant.
A 30% downturn at age 65, right as you're starting withdrawals, can be disastrous.

Because of this, many investors move to more conservative portfolios as retirement nears.

Examples of near-retirement allocations:

• 40–60% stocks

• 40–60% bonds or cash

This approach helps:

• Protect accumulated wealth

• Reduce volatility

• Create more predictable income

• Lower the risk of selling stocks at a loss during the early retirement years

But not everyone should go ultra-conservative

A common misconception is that retirees should move almost entirely into bonds or cash. However, retirees may live 20–30 years—or more—after they stop working. During that period, inflation erodes purchasing power, and overly conservative portfolios may not grow enough to support long-term spending.

Most financial planners recommend keeping some stocks even after retirement for growth and inflation protection.

4. Asset Allocation After Retirement

Retirement isn’t one stage—it’s a long journey. Your 60s look different from your 80s, and investment needs evolve.

Early retirement (ages 60–75): still needing growth

At this stage, you may be drawing income from your portfolio but still need growth. A typical allocation might include:

• 40–60% stocks

• 40–60% bonds

The goal is to strike a balance:

• Enough stock exposure to support long-term growth

• Enough bond exposure to provide stability and income

A portfolio that is too conservative may struggle to support 20+ years of withdrawals.

Mid-to-late retirement (ages 75–90+): more focus on stability and income

As your remaining time horizon shortens, and expenses like healthcare increase, greater stability becomes more important.

Allocations might gradually shift to:

• 20–40% stocks

• 60–80% bonds or cash

This approach aims to minimize the impact of market downturns and allow more predictable withdrawals.

The importance of sequence-of-returns risk

One of the biggest risks in retirement is withdrawing money when markets are down. This can permanently reduce your portfolio’s ability to recover. A diversified allocation—along with having some cash or short-term bonds—helps protect against this risk.

5. How Much Should You Keep in Stocks vs. Bonds?

Finding the right mix is part science, part art. While general guidelines exist, no rule fits everyone perfectly.

Common rules of thumb

“100 minus your age”
A traditional formula suggests subtracting your age from 100 to determine your stock allocation. For example:

• Age 30 → 70% stocks

• Age 60 → 40% stocks

This rule is simple but often considered too conservative today, as people live longer and markets have evolved.

“110 or 120 minus your age”
To account for longer retirements, some advisors recommend:

• 110 − age or

• 120 − age

This typically results in slightly higher allocations to stocks across all ages.

Glide paths (used in target date funds)

A “glide path” is how your portfolio shifts over time. A typical glide path might look like:

• Age 25: 90% stocks / 10% bonds

• Age 45: 70% stocks / 30% bonds

• Age 65: 50% stocks / 50% bonds

• Age 80: 30% stocks / 70% bonds

These allocations reflect a gradual reduction in risk while maintaining growth potential.

Customize based on personal factors

Your ideal allocation depends on:

• Risk tolerance: If you lose sleep during downturns, choose a more conservative mix.

• Retirement income sources: Pensions or rental income may allow for more stocks.

• Health and longevity expectations: Longer expected lifespan may require more growth.

• Spending needs: High withdrawal needs may require less volatility.

• Your desire for legacy or estate planning: More growth may be appropriate if leaving assets behind is a priority.

6. Risk vs. Reward: Understanding the Trade-Offs

Stocks: high reward, high volatility

Stocks provide long-term growth but can experience large swings. Historically, they have outperformed bonds, making them essential for beating inflation over decades.

However, short-term declines of 20–40% are normal. Investors who panic and sell at the bottom often lock in permanent losses.

Bonds: stability with lower return

Bonds tend to fluctuate less and provide steady income. They act as a stabilizing force in the portfolio. However:

• They may not keep up with inflation alone

• They typically offer lower long-term returns

• Interest rates affect their value, so they also carry risks

Cash: safety but low returns

Cash provides stability and liquidity but usually does not grow enough to maintain long-term buying power. Too much cash means losing ground to inflation.

Balancing the risks

A well-constructed retirement portfolio balances growth (to outpace inflation) and stability (to cushion volatility). It cushions downturns without sacrificing long-term wealth.

7. What About Diversification Beyond Stocks and Bonds?

Some investors include:

• Real estate

• REITs

• Commodities

• International stocks

• Inflation-protected securities (TIPS)

These can improve diversification and reduce reliance on any single market. But for most people, a simple stock-bond mix—such as through index funds—is sufficient, especially in tax-advantaged retirement accounts.

8. Keeping the Plan on Track: Rebalancing

Markets will cause your allocations to drift over time. For example, if stocks rise sharply, they may become a larger portion of your portfolio than intended. Rebalancing involves periodically adjusting your portfolio back to its target allocation.

Rebalancing helps:

• Maintain your intended risk level

• Encourage “buy low, sell high” behavior

• Reduce emotional reactions to market swings

Most people rebalance:

• Once or twice per year, or

• When an asset class drifts 5–10% from its target

9. Withdrawal Strategies in Retirement

Even the best asset allocation can fail if withdrawals are too high. Common strategies include:

• The 4% Rule (with caveats): Withdraw 4% in the first year and adjust for inflation.

• Guardrails or dynamic spending: Adjust withdrawals based on market performance.

• Bucket strategies: Divide savings into short-term, medium-term, and long-term “buckets” for different purposes.

Your withdrawal plan should coordinate with your asset mix to reduce the chance of running out of money.

10. Final Thoughts: Building a Sustainable Retirement Portfolio

Choosing the right asset allocation for retirement is about balancing growth, stability, and income needs over what may be several decades of your life.

General guidelines

• During working years: Favor growth.

• Nearing retirement: Reduce risk gradually.

• During retirement: Maintain some stocks for long-term protection but emphasize stability.

• Always: Keep costs low, diversify broadly, and rebalance periodically.

There is no one-size-fits-all solution, but understanding the principles behind asset allocation helps you make decisions that fit your goals and comfort level.

A successful retirement investing plan doesn’t require market timing—it requires clarity, consistency, and the right balance of risk and reward for your stage of life.