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I am 73 and my wife is 70 and have a son. We have $235,000 in a savings account and we each have $250,000 in Roth IRAs. We also have $1.675 million in a brokerage account and $1.55 million in a 401(k). All but the two Roths are invested exclusively in stocks, and the two Roths are made up of 60% stocks and 40% bonds. With Social Security and pensions, our monthly income is $11,000 and we save about $3,800 monthly. Should we change our brokerage and 401(k) accounts to a 60/40 mix and move some of our savings into money market accounts or bonds?
–Randy
Good question, Randy. In your case, it may make sense to base this decision on what you want your money to do for you. Adjusting your asset allocation from 100% stocks to 60% stocks and 40% bonds is a pretty standard move for typical retirees, but I don’t think it’s necessary in your situation. However, depending on your goals, your current asset allocation may have room for improvement. (And if you need extra help managing and investing your retirement savings, consider working with a financial advisor.)
The main reason for maintaining a 60/40 portfolio in retirement is the balance between growth and stability. Ideally, the stock allocation will provide long-term growth for your portfolio so you don’t run out of money, while the bond portion generates income for withdrawals.
This asset allocation may make sense for many retirees who regularly withdraw money from their investments to cover retirement costs. However, it seems you are not in that position.
If I read your question correctly, you have a guaranteed income of €11,000 per month and you save almost €4,000 of that money. It appears that you are not making regular withdrawals from your savings and you don’t need to. If you have $235,000 in a savings account and a total of $500,000 in Roth IRAs already in a 60/40 split, that amounts to $735,000 in relatively stable money. That’s a pretty substantial balance of easily accessible money, especially if you don’t rely on it for regular cash flow. (And if you want an expert to evaluate your asset allocation or manage your portfolio, this free matching tool can connect you with up to three financial advisors.)
A retired couple reviews their investments and decides whether to switch to a 60/40 portfolio.
You have several good options for the remaining money in your 401(k) and brokerage account. Depending on what you want to do with the money and the purpose it serves, I think you can either leave it aggressively invested or move to a more conservative allocation, such as a 60/40 split.
If what I said above about your cash flow is correct – that is, you and your partner want to maximize growth with the remaining money – you can leave it invested as is. You just need to get comfortable with the potential market volatility. An aggressive asset allocation with lots of stocks will yield a higher expected return, allowing you to grow a larger balance over time, but it will likely be much more sensitive to market fluctuations.
However, long-term growth may not be your goal. If you would feel better with a larger balance tailored to your potential spending needs, it would be fine to rebalance your portfolio and switch to a 60/40 split between stocks and bonds. Anyway, I think you’re choosing between two good options.
Of course, keep in mind that your 401(k) is subject to required minimum distributions (RMDs). However, that doesn’t have to be a determining factor in your asset allocation decision, as you can simply transfer the in-kind distribution to your taxable investment account if you wish. (And if you need help managing your RMDs and limiting their tax impact, consider working with a financial advisor.)
A bond ladder or CD ladder is a strategy for investing in assets with different maturities.
As for your savings, think about where this money is currently. If it’s in a regular savings account and earns something close to the national average of about 0.5%, then you can probably get a better interest rate if you at least move it to a high-yield savings or money market account. You can easily find that these accounts offer APYs between 4% and 5%. On a $235,000 deposit, an additional 4.5% would be $10,575 more per year. That is meaningful to most people.
Keep in mind that the interest you earn on a high-yield savings account can change at any time. So if you want to hold interest rates a little longer, you can also consider short-term bonds or certificates of deposit (CDs). If you decide to go for bonds or CDs, I recommend spreading it over a few different maturities, using a so-called bond ladder or CD ladder. This way, not all your money is tied up for the same amount of time.
When a bond or CD within the ladder matures, you simply reinvest that money into a new one. For example, maybe you have a six-month CD and a twelve-month CD. When the six-month CD expires, you can buy another twelve-month CD. Your original 12 month CD only has six months left before it reaches maturity. You repeat the process until you need to spend the money. (A financial advisor can help you set up a CD or bond ladder, or simply help you figure out how much you need to save.)
However, none of this is mandatory, especially if your money is already in a high-yield savings account. If that’s true, you may find that the hassle of shopping around and moving your money will likely only yield a small increase and may not be worth it.
It appears you have sufficient cash flow from your Social Security and pensions, with enough savings to cover unplanned expenses. Any of the asset allocation moves you mentioned could potentially be appropriate, depending on your goals for the money. If you want to increase your retirement income for added security, a 60/40 allocation would better suit your needs than your current 100% stock allocation, but your current allocation could lead to a greater balance over time.
The asset allocation of your portfolio should generally be in line with your risk tolerance, objectives and/or time horizon. SmartAsset’s asset allocation calculator can help you determine how much of your portfolio should be invested in stocks, bonds and cash based on your risk profile.
A financial advisor can help you make important decisions regarding your pension plan. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column. Questions may be edited for clarity or length.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and has received compensation for this article. Questions may be edited for clarity or length.
The post Ask an Advisor: We’re in our 70s and have almost $3.5 million invested “in stocks only.” Should we switch to a 60/40 portfolio? first appeared on SmartReads by SmartAsset.
