How to Find the Right Asset Allocation for Your Retiring Client

What You Need to Know

Before determining a proper mix, clients need to assess the costs related to their preferred lifestyle.
A bucket strategy allows you to put money needed soon into lower-risk investments while earmarking other money for long-term growth.
The overall asset allocation will likely become more conservative as the client ages.

One of the key planning issues for clients nearing and then entering retirement is how to allocate assets. There is no single right answer. All clients’ circumstances and needs are specific to them. 

This includes sources of income, retirement spending and goals for their money. There are a number of target asset allocations for investors at various stages in retirement, and these can be helpful. But at the end of the day, clients are looking to advisors’ expertise to help them devise an asset allocation that fits their objectives, risk tolerance and time horizon. They also seek guidance to adjust this allocation as needed over time.

Here are several things to consider in determining the best mix for clients in this age range.

Retirement Spending Needs

A key factor in clients’ investment planning is their anticipated spending in retirement. What does their lifestyle look like and what will it cost each month? 

Spending needs might include:

Normal living expenses
Cost of travel or other activities in retirement
Health care costs, including Medicare
The cost of long-term care

Income Sources

Where clients derive their income can vary widely and will evolve over time with any single client. 

Sources of income might include:

Earnings from employment or self-employment
Social Security
Pensions
Income from investments
Payments from an annuity
Distributions from investment accounts
Distributions from retirement accounts, including RMDs

As clients transition from working into retirement, their primary source of income will migrate from full- or part-time employment to sources like Social Security, pensions and distributions for both taxable and retirement accounts. For those with a higher percentage of income from fixed sources, this should be factored into their asset allocation.

Age, Life Expectancy and Marital Status

A client who is younger generally has a longer life expectancy than older clients. However, not everyone at the same age has the same life expectancy. Does a client have any known health issues? Does family history point to a potentially longer life expectancy than normal?

For married clients, their portfolio needs to support the retirement of both spouses. If the spouses are relatively close in age, that potentially makes things a bit easier. If there is a significant age gap, this can point to a need to structure a portfolio allocation to help support what might be a considerably longer combined retirement.

Also embedded here is the need to ensure that clients’ investments keep up with inflation throughout retirement.

Risk Tolerance

At any age, a client’s risk tolerance is a key factor. We’ve all seen younger clients who may be more risk averse than we might think and older clients who are still feeling aggressive about their investments. This needs to be balanced between their personal risk tolerance and the level of portfolio growth they need to meet their future retirement income needs.

The Bucket Strategy

As far as allocating a retirement portfolio, advisors will want to think in terms of “buckets,” an approach espoused by Morningstar’s Christine Benz, among others.