Retirement Portfolio Assets: Allocation by Age

As you think about your investments, consider the following factors:

• Time horizon. When do you plan to use the money in your portfolio?
• Financial goals. What are you investing for (first home, children's education, retirement)?
• Investment objective. Are you looking more for growth or income?
• Risk tolerance. Will market fluctuations stress you out? How do you handle market downturns?
• Current and future income sources. Are you working or retired?

The answers to these questions can help you decide whether you're an aggressive, moderate, or conservative investor. This risk profile can influence your mix of stocks, bonds, cash, and other asset classes in your portfolio.

A common asset allocation strategy assesses your investment options by age, under the assumption that the younger you are, the more aggressive you should be with your retirement portfolio. Of course, everyone has different individual needs and behaviors. Some investors are naturally more conservative regardless of age, while others defy conventions. For example, older investors focused on passing their wealth to their heirs rather than on using it for retirement goals could be more aggressive than their peers.

Many investors split their portfolios between stocks, bonds, and cash because it's one way to balance growth and investment risk versus income and safety. Over the long term, stocks have historically provided growth. In exchange for this growth potential, however, investors assume risk that goes well beyond that of fixed income investments like bonds and certificates of deposit.

In addition to offering diversification, bonds and similar investments are designed to provide regular income, which can help reduce the level of risk and volatility compared to stocks. Price appreciation is a secondary consideration.

Nevertheless, keep in mind that all investments involve risk, including the loss of principal.

Creating a diversified portfolio based on your age shouldn't be a one-and-done activity. Asset allocation is about finding the blend of investments that works for the current stage of your financial journey. For example, younger and middle-aged investors may have a higher allocation in stocks because they may have goals with longer time horizons, such as building their retirement savings, and thus have the capacity to better withstand market downturns. Retirees, on the other hand, may tend to have more in cash, bonds, and fixed income investments to help reduce risk, navigate market downturns, or generate income to help meet daily expenses.

But you don't have to allocate assets strictly by age. After a major life event occurs, such as the birth of a child or a career change, it's important to review your asset allocation to make sure it aligns with new goals and investment objectives. If it doesn't, you may want to reallocate your portfolio (shift assets around, known as "rebalancing") to help you stay on track. You may also have other goals, such as saving for a child's college education, that may have shorter time horizons.

Changing market conditions are another reason to keep an eye on your asset allocation. Market fluctuations can cause your portfolio to become more aggressive or conservative than you intended. For example, a strong stock market could shift your portfolio from 60% stocks and 40% bonds to 65% and 35%, respectively. This change is fine if you're comfortable with the new weighting and it meets your needs. Otherwise, you may want to rebalance your portfolio so it reflects your target allocation.

With so many things competing for your attention, it's easy to put off reviewing your investments. But Schwab has tools and resources to help you review your portfolio. Log in to your Schwab account to get started.

A portfolio asset allocation that fits your goals, time horizon, and—if appropriate—age is key to your financial well-being now and in the future.