The allocation to stocks, fixed income, and cash that's best for you will depend on your circumstances and tolerance for risk. You may consider starting retirement at no more than a moderate level of risk and gradually shifting your portfolio toward more fixed income investments. As your retirement time horizon becomes shorter, your risk tolerance declines, and your need for long-term growth lessens.
Here's an example of how you might adjust your asset allocation through retirement.
|5% cash||10% cash||30% cash|
|35% fixed income||50% fixed income||50% fixed income|
|60% stocks||40% stocks||20% stocks|
|Return (1970–2013)||Return (1970–2013)||Return (1970–2013)|
|Average Annual Return: 9.8%||Average Annual Return: 9.1%||Average Annual Return: 7.9%|
|Best Year: 30.9%||Best Year: 27.0%||Best Year: 22.8%|
|Worst Year: –20.9%||Worst Year: –12.5%||Worst Year: –4.6%|
Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The return figures are the average, the maximum and the minimum annual returns of hypothetical asset allocation plans. The asset allocation plans are weighted averages of the performance of the indices used to represent each asset class in the plans and are rebalanced annually. The Conservative allocation is composed of 20% stocks (15% large-cap stocks, 5% international stocks), 50% bonds, and 30% cash. The Moderately Conservative allocation is composed of 40% stocks (25% large-cap stocks, 5% small-cap stocks, 10% international stocks), 50% bonds, and 10% cash. The Moderate allocation is composed of 60% stocks (35% large-cap stocks, 10% small-cap stocks, 15% international stocks), 35% bonds, and 5% cash. The indices representing each asset class in the asset allocation plan are S&P 500® Index (large-cap stocks); Russell 2000® Index (small-cap stocks); MSCI EAFE® net of taxes (international stocks); Barclays U.S. Aggregate Bond Index (bonds); and Citigroup U.S. 3-month Treasury bills (cash).
CRSP 6-8 was used for small-cap stocks prior to 1979, Ibbotson Intermediate-Term U.S. Government Bond Index was used for bonds prior to 1976, and Ibbotson U.S. 30-day Treasury bills was used prior to 1978. Results assume reinvestment of dividends and interest. Indices are unmanaged, do not incur fees or expenses and cannot be invested directly. Past performance is no indication of future results. For more information on the methodology for the long-term return estimate calculations, see Market Insight article "Q&A: Estimating Long-Term Market Returns."