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By Christine Benz and Jeremy Glaser | 07-23-2015 03:00 PM

3 Retirement-Planning Rules of Thumb and When to Flout Them

These conventions became "rules" for a reason, but investors need to customize these rules to their circumstances, says Morningstar's Christine Benz.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Many investors use rules of thumb to help guide the retirement portfolios. I'm here with Christine Benz--she is our director of personal finance--to look at a few of these rules of thumb and also when it's appropriate to flout them.

Christine, thanks for joining me.

Christine Benz: Jeremy, it's great to be here.

Glaser: Let's start with the first one about figuring out your bond/stock mix. There is a rule out there that you should take a 100, subtract your age, and that's how much you should have in stocks. Does this strike you as a good jumping-off point for figuring out your asset allocation?

Benz: I think it's better than nothing. You often hear Jack Bogle saying to use this really intuitive idea for figuring out whether your asset allocation is in the right ballpark. It's based on a really simple principle, which is that as you get closer to needing to spend your money, you need to secure that money in safer securities like cash and bonds, because the shorter the time horizon, the greater the likelihood that you could have a negative result by holding stocks during a very short time horizon.

So, it's based on a very intuitive idea. I think it's a decent starting point for people who have no idea about where to start with their asset allocations. But certainly for people getting close to retirement, it really does make sense to think about your anticipated spending needs from that portfolio and let that, more than anything, drive your asset allocation.

So, if you are a retiree who is lucky enough to come into retirement with, say, a pension and Social Security, and those two sources together are supplying most of your needed income while just sipping from that investment portfolio, for that sort of person, a more aggressive asset allocation probably makes more sense than using 100 minus your age to drive the equity allocation. So, definitely take a step back and think about your own individual spending needs from that portfolio rather than just taking that rule of thumb and running with it.

It's also really important to factor in your own risk tolerance. If you're a person who has examined your past behavior in past down markets and you've seen that you really freaked out during previous down markets--you completely upended your investment plan at the worst possible time--if you're a person with a history of behavior like that where you know that your risk tolerance is not good, I think it does make sense to perhaps have an even more conservative equity allocation than prescribed by that rule of thumb.

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