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Setting an Appropriate Asset Allocation

Christine Benz

Christine Benz: Hi, I’m Christine Benz for Morningstar.com. Setting an asset allocation for your retirement portfolio can seem really daunting. You may have heard that you need to hold a fair amount of safe assets, but how much is enough? To help arrive at an asset allocation framework that's customized to your own situation, take a look at your planned spending from your portfolio, and use that amount to determine how much you should hold in each asset class. In my Model Bucket Portfolios, I've earmarked two years' worth of portfolio withdrawals in cash investments, another eight years' worth of portfolio withdrawals in bonds, and the rest in long-term assets, mainly stocks. 

To use a real-world example, let's say a retiree plans to spend $30,000 per year of her $1 million portfolio. In that case, she'd hold $60,000, or two years' worth of withdrawals, in cash; another $240,000 in bonds, and the remainder in stocks. Of course, if she knows herself to be extremely risk-averse, she'd probably want to adjust her equity weighting downward. 

Thanks for watching. I'm Christine Benz for Morningstar.com.