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Retirement planning 101: Seven questions you need to answer

2. What will your 'asset allocation' be?

Richard Drew/AP
Specialists Patrick King, left, and Christopher Carella work on the floor of the New York Stock Exchange earlier this week. Typically, younger people have a greater share of their retirement assets allocated to stocks than do older people. But some financial planners urge even seniors to remain heavily invested in stocks because of their better long-term return historically.

  • By Mark Trumbull Staff writer

Deciding what share of you savings to put into different types of assets – stocks, bonds, etc. – is a crucial step. It can go a long way toward determining how fast your money grows and how much financial risk you face from market gyrations.
 
The classic advice is that younger savers should put a majority of their money into stocks, generally via mutual funds, and then shift increasingly toward fixed-income investments (which are less volatile in price) as they get closer to retirement. But coming up with a plan is an individual matter that depends in part on your own tolerance for risk.

It doesn't do any good to try to follow some expert's "ideal" plan if you can't sleep at night as a result.
 
Some questionnaires on financial-company websites offer to help you find the right mix of assets. In some cases real-world events can provide a gut check that confirms – or changes – your framework.
 
Note that even finance experts differ, sometimes sharply, on the best approach. Some financial advisers have urged retirees to maintain a substantial portion of assets in stocks, with the idea that the capital gains will generally sustain a nest egg longer in today’s era of expanding longevity. A counter view, argued in a new book "Risk Less and Prosper," by economist Zvi Bodie and financial consultant Rachelle Taqqu, is that Americans have put too much faith in stocks, which can be risky even when held over long time periods.
 
Mr. Bodie advises that more emphasis be placed on inflation-protected bonds. And, when retirement comes, he says fixed annuities are an important guaranteed-income option.
 
Still, over the 80 years ending in 2006, the inflation-adjusted annual return of stocks was 7 percent annually, using the Standard & Poor's 500 index as a benchmark. Such performance can mean savings held in stocks grow much faster in general than savings in bonds (2 percent real annual return over that time period) or cash (Treasury bills posted a 0.8 percent annual return during those decades, according to the investment firm Vanguard).
 
One final asset-allocation option to mention: handing the keys to an "expert" by investing in a so-called target-date mutual fund. Vanguard, for one, reports fast-rising use of these funds, which come with a mix of stocks and bonds precooked for individuals in a specific age bracket.

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Mark Sappenfield
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