It’s common investing wisdom for investors to reduce their portfolio allocation to equities
as they age and gradually move to less risky assets
—such as bonds. But many think they should be highly conservative after they retire and allocate too much to bonds or cash
. By doing so, they may be putting themselves at risk of running out of money before running out of life. And this risk is even greater today considering people are living longer.
The potential solution?
During an investor’s working years, the focus is on regular savings and market growth
to build a retirement nest egg. But Russell Investments' research shows that when investors reach retirement, following a strategy that keeps their portfolio growing is crucial to fund their desired lifestyle.
Based on Russell’s 15/35/50 Retirement Lifestyle Rule
, the total value of an individual investor’s cumulative retirement income can come from the following sources:
That means that 85 cents of every dollar in retirement income may come from investment growth.
- 15% from money saved during an investor’s working years
- 35% from the investment growth realized before retirement
- 50% from investment growth that occurs during retirement
The key is making sure investors have the right portfolio asset mix in place at retirement and during retirement—one that balances the general stability of bonds with the potential growth of equities.
Manage risk while planning for growth
When it comes to designing an effective retirement portfolio, there are three primary risks to consider:
- Market Volatility: If the market declines, the value of a portfolio will be affected. To address this risk, it often makes sense to move into more conservative investments as retirement approaches—but be careful of being overly conservative.
- Longevity Risk: Many people underestimate their life expectancy. If a portfolio does not continue to grow during retirement, there’s a risk of running out of money.
- Sequential Risk: The timing of when an investor moves from accumulation to decumulation can be crucial to the long-term health of their investment portfolio due to the sequence of investment returns. Poor returns early in retirement are much more harmful to an investor’s retirement portfolio than poor returns later in retirement. The more equity-oriented a portfolio is, the larger the potential impact of sequential risk.
Note: The Russell 15/35/50 Retirement Lifestyle Rule is an update to the 10/30/60 Rule. The 15/35/50 Rule uses Russell’s glide path methodology¹ which adjusts a portfolio’s allocation to be more conservative over time, whereas the 10/30/60 rule used static equity portfolio growth assumptions.
The bottom line
No one wants to run out of money before running out of life. The Russell 15/35/50 Retirement Lifestyle Rule can be used as a conversation starter to help investors plan for and reach their retirement goals. It’s all about striking a post-retirement asset mix that offers the potential to fund spending goals for the rest of an investor’s life. And it’s also important to regularly revisit a portfolio’s asset mix as investor goals change.
Download the full article
to learn more about the Russell 15/35/50 Retirement Lifestyle Rule.