This paper is intended to help you select your target asset allocation. The target audience of this paper is retirees.  The choice of a target asset allocation is an important investment decision. Thus, before making this decision, you should consult your financial advisor to discuss the ideas expressed in this paper. But the bottom line is that it is your decision to select the asset allocation that is appropriate for you.

Financial Preparedness for Retirement

Before retiring, you should be both mentally and financially ready to retire. Some people are not mentally prepared to retire. They would rather work than retire from the workplace.

Even if someone is mentally prepared to retire from the work force, he or she should consider whether he or she is financially prepared for retirement. The key question concerning your financial preparedness for retirement is whether you will have sufficient funds to meet your retirement needs. To assess this issue, you need to examine your sources of income in retirement. For many retirees, including what I and others have called “typical retirees,” the only sources of income in retirement will be 1) their financial portfolio and 2) Social Security benefits.  Later in this paper, I will present a range of recommended asset allocations by professionals at mutual fund families for typical retirees by age.  As we shall see, there will be more agreement than disagreement about what the asset allocation should be for a typical retiree in his or her mid-60s –often assumed to be the age of retirement – and for a retiree well into his or her retirement years.

However, many retirees are not typical retirees in the sense that have other income-producing assets that will provide funds to help meet their retirement needs. These assets may include defined-benefit pension plans, payout annuities, income-producing real estate like rental housing, and income-producing natural gas wells. I refer to these other sources of income as extended assets. Furthermore, some retirees work part time, and the after-tax value of future wages is also an extended asset. In addition, the extended portfolio may include other assets that the retiree would be willing and able to sell to provide income to meet retirement needs, such as a vacation home. In Jennings and Reichenstein (2008)[1], we reviewed several studies and concluded that “there is now broad agreement among academics and professionals that private wealth managers should manage a client’s extended portfolio that includes the financial portfolio and, at a minimum, Social Security, defined-benefit plans, and payout annuities (page 39).”

An example will help clarify the idea of an extended portfolio. The Smith and Jones families have a lot in common. Both pairs of married couples are in their mid-60s. They both have $1,000,000 of financial assets in their 401(k)s, which is the entirety of their financial portfolios. They both receive $40,000 per year in Social Security benefits, an amount that will increase with inflation. Both couples have $250,000 houses that are owned free of debt.  Neither couple has debt (outside of monthly credit card bills that are paid in full). It sounds like they could each afford to spend comparable amounts per year in retirement. But that is not the case, because the Smiths have no extended assets, while Mr. and Mrs. Jones are both retired officers of the U.S. navy.  Their military retirement payments will pay each of them $45,000 per year. Furthermore, after the death of the first spouse the surviving spouse will collect both pensions worth $90,000.

Clearly, the financial position of the Jones family is materially different from that of the Smith family. Moreover, as I will explain later, the Jones’ military retirement plans, which are defined-benefit pension plans, are like owning a large portfolio of Treasury Inflation-Protected Security (TIPS) bonds. These TIPS bonds are inflation-linked bonds issued by the U.S. Treasury.  As I will explain later, I believe this large bond-like extended asset should affect the asset allocation of their financial portfolio.


Typical Retirees and a Range of Asset Allocations for such Retirees by Age

Typical retirees meet the following conditions.

  1. They will attain all of their funds to meet their retirement needs from two sources: their financial portfolio and Social Security benefits. Thus, they have truly retired and do not have future wages and salary to support their needs. In addition, they have no extended assets in their extended portfolios.
  2. All resources are intended for their retirement needs. If they die with funds remaining in their financial portfolio then someone – probably their children – will inherit these remaining funds. But they are managing their financial portfolio to meet their financial needs.

Table 1 presents the recommended asset allocations for a typical new retiree, which is usually considered to be a 65-year-old retiree, by professionals at Fidelity and Vanguard. In addition, Table 1 shows the final lowest-risk recommended asset allocation for an older retiree and at what age that asset allocation should be attained. Vanguard and Fidelity are, respectively, the largest and second largest mutual fund families. So, Table 1 presents the thinking of teams of investment professional at two leading mutual fund families.

For typical new retirees age 65, Fidelity recommends a 55% stock-45% fixed-income asset allocation. In addition, based on the June 26, 2017 asset allocations of the Fidelity 2015 Fund, which is designed for individuals who will retire approximately in 2015, the professionals at Fidelity recommended that 35% of the stock portion of the portfolio be allocated to international stocks. For the Fidelity Income Fund, which is the most conservative portfolio and is expected to be reached “10-19 years after the target date,” the target stock allocation is 24%. As of June 26, 2017, about 39% of the stock portion of this fund was allocated to international stocks.

For typical new retirees age 65, Vanguard recommends a 50% stock allocation, including 40% of the stock portion of the portfolio being allocated to international stocks. Vanguard’s target asset allocation falls to 30% for retirees seven years or more past normal retirement age. The professionals at Vanguard recommend that 40% of the stock portion of the portfolio being allocated to international stocks for all of its Target Retirement Funds. That is, for typical retirees from age 22 to 99, they recommend that 40% of the stock portion of the portfolio be allocated to international stocks.

There are important lessons that can be gleaned from the asset allocations recommended by Fidelity and Vanguard. First, a typical new 65-year-old single retiree should have a stock allocation of approximately 50% or higher. This typical new retiree may live 25 more years, but she should plan for perhaps a 30-year horizon to provide reasonable assurance that her financial portfolio will last her lifetime. A new retiree who spends money equally over a 30-year retirement period will have an average investment horizon of 15 years for his financial portfolio. Thus, even though she is retired, the investment horizon can be relatively long – and thus there is a need for a healthy dose of stocks in the asset allocation. If a new retiree has a short life expectancy, perhaps because of a terminal illness, then I (and I assume Fidelity and Vanguard), would recommend a more conservative portfolio for this new retiree.

There is one point in which I disagree with Fidelity and Vanguard. Consider my situation. My wife is six years younger than me and the bulk of our wealth is in my retirement plans. Suppose I retired at 65. Fidelity and Vanguard recommend that I make plans based on the year I retire and thus on my life expectancy.[2] I believe I should make plans based primarily on my wife’s life expectancy. These funds are intended to meet retirement needs for the rest of our joint lives.  Thus, everything else the same, if I was retired and 65 then I should have an even heavier stock allocation. In short, my 59-year-old wife’s life expectancy should dominate my thinking when selecting an asset allocation for our joint financial portfolio.


Table 1: Fidelity and Vanguard’s Recommended Asset Allocations by Age for Typical Retirees  

Fidelity Stock allocation Int’l stk/

Total stk

Vanguard Stock allocation Int’l stk/

Total stk

22 year old     22 year old    
65 year old 55% 35% 65 year old 50% 40%
75-84 year old 24% 39% 72 year old 30% 40%


Second, prudent investment management requires not putting all your eggs in the same basket, even if that basket is the U.S. Thus, professionals at these leading mutual fund families (and others not listed here) generally recommend that approximately 30% to 40% of the stock portion of the portfolio be allocated to international stocks. Some individual investors may not be familiar with international stocks, and thus feel uncomfortable making such as sizable allocation to this asset class. But, based on the history of returns, the more knowledgeable professionals at these and other mutual fund families recommend a healthy dose of international stocks.

Third, as a typical retiree ages, the recommended stock allocation decreases but it should never reach 0%. Historically, the lowest-risk portfolio, as measured by standard deviation, is not a 100% bond portfolio. Rather, depending upon the choices of the stock and bond return series, the lowest-risk portfolio may contain 20% stocks. Furthermore, as the stock allocation increases slightly beyond this lowest-risk portfolio, the additional average return per unit of risk is high. For example, moving from say 20% to 30% stocks may appreciably raise the average return for a minor increase in risk.  Thus, this risk-return tradeoff suggests that even older retirees with limited life expectancies should maintain some stock allocation – perhaps 25% to 30%.

For example, Ibbotson Associates has produced return series beginning in 1926 on several asset classes. Using Ibbotson’s 1926-2014 annual returns for U.S. large-cap stocks (S&P 500 since 1957) and 20-year Treasury bonds, the lowest-risk portfolio (in 5% stock increments) contains 20% stocks and 80% bonds. This 20% stock portfolio has a standard deviation of 8.91% and a geometric average return of 6.9%. For comparison, the 25% and 30% stock portfolios have standard deviations of 8.99% and 9.20% and geometric average returns of 7.2% and 7.5%, respectively. For 1926-2014, the 30% stock/70% bond portfolio is about 3% riskier than the 20% st