What Percentage Should You Invest In Stocks Based On Your Age? (2024)

One of the keys for solid retirement planning is having enough stocks and stock funds in the diversified portion of your nest egg. But how do you know how much stock is enough?

X

Young investors are told again and again, don't be overly cautious. You need stocks to make your retirement savings grow. Many older investors in or near retirement want the smoother ride that bonds provide. But again and again they're told they need stocks too and lots of them, for growth to get through as much as 30 years or more of retirement. Confusion is stoked by the market's volatility this year.

"It's one of the most fundamental questions in retirement planning," said Roger Young, a senior financial planner for giant mutual fund firm T. Rowe Price (TROW).

Remember, we're talking only about the section of your portfolio devoted to mutual funds and ETFs. The section of your portfolio devoted to individual stocks follows different, time-tested rules for buys and sells.

Retirement Planning: How Much Of Your Retirement Portfolio Should Be Invested In Stocks?

So how much of your diversified portfolio should be in stocks and stock funds? What weighting should your retirement planning aim for?

One old rule of thumb: subtract your age from 100. The result was the percentage of your portfolio that should be in stocks. For example, at age 65, 35% of your portfolio should be in stocks. But with today's longer life spans, many planners say you need more stock than that. Perhaps the rule of thumb should be updated to subtracting your age from 110 or 120.

Even if you update that old rule of thumb, figuring out the right portion to devote to stocks boils down to two factors, not just one: time horizon and risk tolerance.

Why both? "Two people can be the same age," Young said. "But they may have starkly different reactions to market volatility."

One 60-year-old may toss and turn all night, unable to fall asleep when the market dives 5% on some bad news. Another 60-year-old, this one with nerves of steel, might fall asleep before his head even hits the pillow, despite the same market volatility.

"It doesn't help a skittish investor to have a 90% stock allocation with a lot of potential return if they're likely to panic in a market sell-off and sell off their funds," Young said. Studies find that investors who sell their mutual funds in response to volatility tend to sell low and buy high. That's the exact opposite of what investors should aim to do.

Successful Retirement Planning

Successful retirement planning takes into account each investor's specific needs.

And risk tolerance is a vital part of that. Recognizing that investors in any one age group have different levels of risk tolerance, T. Rowe Price recommends wide ranges of stock weightings for people in various age groups:

• Twenties & thirties: 90% to 100% in stock.
• Forties: 80% to 100% in stock.
• Fifties: 65% to 80% in stock.
• Sixties: 45% to 65% in stock.
• Seventies & older: 30% to 50% in stock.

T. Rowe Price, for one, recently increased the stock allocations for investors in some age groups. "We decided that portfolios must last and fulfill investors' needs for more years in retirement," Young said.

How Much Target Date Funds Allocate To Stocks

But how can you pin down the best, exact stock allocation for the funds portion of your retirement plan? Maybe you're far more conservative than the average investor. Or maybe you can stomach much more market volatility.

One good way is to follow the example of professional money managers who run target date funds. Those funds shift their mixes of stocks, bonds and cash — and sometimes alternative asset classes like real estate as well — as their target dates approach.

Target dates often stand for retirement dates. But, because people can expect to live decades in retirement, many funds continue to shift their asset allocations even after reaching their target dates.

So here are the average stock, bond and cash weightings for target date funds with various target dates.

• 2020 target date funds average 40.73% stock weighting. Two of the largest funds in the group have stock weightings of 56.41% and 48.31%.
• 2030 target date funds average 59.66% stock weighting.
• 2040 target date funds average 77.70% stock weighting.
• 2050 target date funds average 87.30% stock weighting. Two large funds have stock weightings of 96.78% and 88.30%.

Low Risk Tolerance

What if your heart jumps when you see the average stock weighting for the funds that target the year you have in mind for retirement? If a fund's stock weighting strikes you as too aggressive, find a target date fund that has a more conservative weighting. Is the fund among the biggest in its target-year group? That's a sign of popularity. How's its performance track record over short and long time periods?

If you prefer, check the stock weightings of funds whose target date is earlier. Their weightings will likely be more conservative. That's do-it-yourself retirement planning.

The Role Of Retirement Income Generation

There's one more thing to consider as you refine this retirement plan. In the old days — back when banks paid interest of 5% or so — didn't investors choose stock and bond weightings based on how much income they needed from their portfolios? Didn't they cram as much of their portfolios into income-generating funds as possible?

"Not these days," Young said. "The days when you could expect to live solely on interest and dividends are gone — at least for now. Now, as you need more income, you tap into your principal by liquidating investments."

Today, yield on the 10-year Treasury is well below 1%. Yield from is typically shy of 2%. Learn how to squeeze income from your portfolio in this other IBD report.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.

YOU MAY ALSO LIKE:

What Are The Most Trusted Financial Companies? Take The Survey

You Need This Much Retirement Savings At Your Age And Income

Check Out IBD's New IBD Live Panel Discussion

How Long Will Your $1 Million Last In Retirement?

Which Stocks Are Breaking Out Or Near A Pivot Point? Check MarketSmith