The old rule of thumb for asset allocation used to be that you should subtract your age from 100 to calculate the percentage of your portfolio that should be in stocks.

For example, if you’re 60 years old, you should have 40% of your portfolio in stocks and the remainder in bonds or similar fixed income securities (under the old method).

Times have changed.

Americans are living longer and yields on bonds and other fixed income securities have become abysmal.

That means that the old rule of thumb is out.

Many financial advisors recommend using 110 or even 120 as a better number that you subtract your age to arrive at the percentage of your portfolio that should be in stocks.

The number you should use depends on your risk profile.

Can’t stomach a market downturn? Does having money in the stock market keep you up at night? Then the number you use should be lower.

Are you the type of person that doesn’t look at the day to day swings of the market and instead focuses on long term trends? The the number you use should be closer to 120.

Also, understand that cash has a risk. Cash protects you from deflation and gives you more options, but in the long term holding too much cash reduces your purchasing power.

I recommend using 120 as the number you should use to subtract from your age to arrive at the percentage of your portfolio that should be allocated to stocks.

If you’re currently 60 years old, you should have approximately 60% of your portfolio in a diversified group of stocks or stock funds and 40% in bonds and fixed income securities.

Let’s look at an example given this scenario.


Pretty simple rule: 60% in stocks or stock funds and the remaining 40% in bonds or fixed income securities (for a 60 year old).

The purpose of this diversification is to dampen volatility and ensure you don’t take a large loss nearing retirement. Notice that diversification doesn’t increase your returns.

It’s not the number of assets that determines diversification; it’s the correlation between them.

If I purchase ten different banks stocks and think I’m diversified, I have a problem. Bank stocks trade in tandem with each other with a R-squared in the 90s.

Portfolio beta can also be taken into consideration to reduce market risk, especially if your portfolio contains individual stocks.

A lower beta would reduce market risk but not firm specific risk. If you go this route, you can calculate portfolio beta by adding the beta of each individual stock multiplied by the weight that stock has in your portfolio.

Assume your portfolio is made up of two stocks (just to make it easier to calculate). Stock MSFT has a beta of 1.2 and makes up 50% of your portfolio and stock PG has a beta of 0.8 and makes up 50% of your portfolio. Your portfolio beta would be equal to 1.0  which means that you have average market risk [(1.2 * .50) + (0.8 * .50)].

After you determine the asset allocation, the next step is to fill in your portfolio with assets.

Many of you reading this likely already have a portfolio, but maybe it could be refined to maximize your retirement income. Usually as you get older, income becomes more and more of a priority (although I would argue that income should be an important part of a 30-something’s portfolio as well).

Some of you buy individual stocks, some mutual funds, still others buy target date funds. There is no right or wrong answer as to what you should own. You have to buy what fits your risk profile and what makes sense to your specific situation.

The Goal

You want to optimize your retirement finances. That is you want to get the most amount of money from your assets, pay the least in taxes, and take on less than your maximum risk tolerance.

An example of which may look like this for our 60 year old soon-to-be retiree:



This $1 million portfolio contains 1 index fund, 1 mutual fund, 9 stocks, and 4 fixed income securities allocated as a 60/40 split as shown in the chart below:

Again, this is just an example. You could swap out the Vanguard funds with Fidelity, T Rowe Price, or other funds. The individual stocks in this example make up 35% of the portfolio and are the largest stocks by market cap in the United States.

You could expect a portfolio like this to generate approximately $30,000 in income annually.

Could you allocate the entire 60% equity portion to individual stocks?

Yes, as long as you have a number of stocks across different industries.

Could you hold just one fund?

Yes, one fund that holds a diverse group of stocks would be fine. The example portfolio holds the Vanguard 500 Admiral Shares which holds the S&P 500 stocks.

For the bond / fixed income side of the portfolio, I like to keep the duration pretty short because interest rates are so low.

As interest rates rise, bonds drop in price and long-term bonds get crushed as rates rise. That’s why you wouldn’t want to hold a bond that has a maturity greater than seven years (intermediate).

You can hold a seven year bond for the entire seven years so there would be no risk to hold it to term. However, if you’re holding a 30-year treasury and rate rise to 6%, your bonds would be worth much less than you paid for them.

What’s Right For You?

What’s the best allocation for your age? You’re likely to live much longer than your parents and grandparents. You’ll need to generate some sort of income from your portfolio in retirement. Given these two facts, more financial advisors, myself included, are recommending you use 120 minus your age to come to the percentage of your portfolio that should be in stocks or stock funds.

Think It’s Risky?

It’s not as risky as holding onto cash and running out of money in retirement.

If you do it correctly or even close enough to correctly, you’ll be able to optimize your retirement income and generate passive income in retirement.