Ideal Asset Allocation in Retirement: 60/40 vs. 70/30
Asset allocation is one of the most important aspects of retirement planning. It can influence the fate of your investments and also determine how well they align with your risk tolerance and financial goals.
Asset allocation refers to how you divide your investment capital across different asset classes, primarily equity (stocks) and debt (bonds). For example, if you have $100 to invest, you might allocate a portion to equity and the rest to debt. You may even allot all of it to one asset class and none to the other. The percentage you choose will determine your asset allocation. Two of the most popularly used allocation models are the 60/40 and 70/30 portfolios
But which one makes more sense for retirement? Is a 70/30 portfolio in retirement a good idea, or should you stick to a 60/40 one? Let’s break down the differences and understand how each strategy works.
Table of Contents
What is the 60/40 rule for asset allocation?
The 60/40 rule is one of the approaches to asset allocation. It suggests allocating 60% of your portfolio to equities and 40% to bonds or other fixed-income instruments. The higher allocation, at 60%, represents your investment in growth-oriented assets such as stocks. In comparison, the remaining 40% is invested in relatively stable options such as government bonds, corporate bonds, certificates of deposit (CDs), or money market funds.
This allocation helps strike a balance between risk and reward, which is why it is typically used by risk-averse investors or those who prefer to keep a balance between growth and stability. The equity portion offers potential for long-term growth. It also helps your investments keep pace with inflation.
On the other hand, the bond portion offers stability and helps you reduce overall volatility. The 60/40 mix is generally considered suitable for investors who prefer a stable yet growth-oriented portfolio. It can be used by people nearing retirement, those already retired, and even those who want to invest in equity while maintaining a balanced portfolio.
A 60/40 allocation can be applied across various types of investment accounts, including your general investment portfolio, 401(k), or Individual Retirement Account (IRA).
What is the 70/30 portfolio in retirement?
The70/30 portfolio in retirement follows a similar concept to the 60/40 rule, with a slight difference. Instead of 60% in equity and 40% in debt, this asset allocation mix invests 70% of your capital in equities and 30% in bonds or other fixed-income options. While a 10% difference may not sound like much, it can have a significant impact on both risk and returns over time.
With a higher equity allocation, the 70/30 rule of investing offers greater potential for long-term growth and stronger protection against inflation. However, it can also carry more risk. Investing relatively less in debt offers less stability to your portfolio, and your investments may fluctuate more during market downturns.
This allocation is typically better suited to investors with a higher risk tolerance and a longer investment horizon. So, you can consider this if you are younger and have many years until retirement. You can also consider it if you are retired, provided you are willing to take on some risk.
Like the 60/40 portfolio, the 70/30 rule of investingcan be applied across different investment accounts. So, you could use it for your retirement accounts, like a 401(k) or an IRA, or for your general investment portfolio.
What is the difference between 60/40 and 70/30 asset allocation?
While the fundamental differences between the 60/40 and 70/30 asset allocations are clear, you also need a little deeper understanding of how each of these allocations can actually impact your portfolio. Let’s break it down point by point:
- Return potential: The most significant difference between these two strategies lies in growth potential. The 70/30 rule of investing has a higher share of equities. Hence, it generally offers greater return potential compared to a 60/40 portfolio mix. Equities have historically outperformed bonds over the long term. They can grow and benefit from compounding. For instance, the S&P 500 has delivered an average annual return of about 10.53% since its inception in 1957 through the end of 2024. In contrast, the iShares 20+ Year Treasury Bond ETF has averaged around 3.87% per year since its July 2002 launch. The difference is evident.
So, if your goal is long-term growth and you are comfortable riding out market volatility, a 70/30 allocation might make more sense. However, if you want stability, a 60/40 portfolio can provide a better balance. - Risk: Higher returns come with higher risk. If you choose a 70/30 portfolio, you will witness more risk with a higher exposure to market volatility because a larger portion of your money is in equities. Now, that is not necessarily a bad thing. When you are younger, you have time on your side. You can afford to ride out market ups and downs, and eventually earn long-term yields that can help you build a bigger retirement corpus.
However, keeping a 70/30 portfolio in retirement can be risky. At that stage, you have more to lose and less time to recover from market downturns. If you see a major downturn, your portfolio might drop in value when you need your money the most. A 60/40 mix may offer a better balance. It will reduce volatility, but it will still provide some equity exposure for potential growth.
Ultimately, the right choice is yours. Having said that, for older investors, preserving capital may be more important than earning higher returns. - Horizon: The 70/30 rule of investing is likely to work better with a long-term horizon. Equities are known for their potential to generate higher returns, but they need time to deliver. The stock market is not a place for quick gains. It requires patience, consistency, and the ability to stay invested through market ups and downs.
So, if you choose a 70/30 mix, time should be your ally. If you are in your 20s, 30s, or even 40s, a higher equity allocation can help you. You have enough years ahead to weather volatility, let compounding work its magic, and potentially deliver higher returns. This way, by the time you approach retirement in your 50s or 60s, you will have a sizable portfolio that can cover your needs.
However, if you are nearing retirement or already there, a 70/30 mix might be too volatile for you. In that case, shifting toward a 60/40 or even more conservative allocation can help protect your savings. - Suitability for investors: A 70/30 portfolio is better suited for investors who are comfortable taking on higher risk. These are typically younger investors, experienced investors, or those with a long-term horizon. These investors can afford to ride out market volatility and possibly earn higher returns over time. If you have time on your side and can handle risk with likely short-term dips, the 70/30 rule of investing could work well for you.
On the other hand, a 60/40 portfolio is ideal for retirees, those nearing retirement, new investors, or anyone with a low-risk appetite. This mix prioritizes stability and consistent income. It helps protect your capital while still allowing for some growth, so your investments continue to grow, even if it is at a relatively lower pace.
Time for the final verdict – 70/30 rule of investing vs the 60/40 allocation mix – What should you choose?
Is a 70/30 portfolio good?Absolutely.
Is a 60/40 portfolio good? Yes, that too.
Both work well.
It just depends on when and why you use them. The 70/30 portfolio can be a good choice when you are still building wealth and have time on your side. However, it can get risky once you are close to or already in retirement. You can still choose it then, but only if you fully understand and are comfortable with the risks involved.
It is always recommended to speak to a financial advisor before making that call. If you prefer more stability and less volatility, the 60/40 mix might suit you better. It gives you the comfort of steady returns and income without exposing your savings to losses.
It is also important to remember that your asset allocation is not fixed forever. You do not set it and forget it. Over time, market movements can naturally shift your portfolio. For example, if your equities perform well, your 60/40 mix might drift to 70/30 or even 80/20 without you changing a thing. That is why rebalancing regularly is key.
As your life changes, you grow older, earn more or less, or your risk tolerance alters, your investment portfolio should change too. In your younger years, a 70/30 split makes sense. But as you get closer to retirement, gradually shifting toward a 60/40 mix may offer you more peace of mind.
If you choose the 70/30 route, focus on growth-oriented options such as stocks, index funds, and mutual funds. For the 30% in debt, consider dividend-paying bonds or funds for consistent income and stability. The right mix will keep your portfolio balanced and aligned with your goals.
You can certainly benefit from speaking to a financial advisor when constructing your portfolio. Professional advisors can recommend suitable allocation mixes based on your needs, age, risk appetite, and goals. They can also help you review and rebalance your portfolio when needed. And, they can help you explore other models like 80/20, 50/50, and more, if they make more sense for your situation.
Beyond the ratios: Choosing the allocation that fits you
The60/40 and 70/30 rules of investing are good general frameworks. However, they go beyond mere numbers. You need to dig a little deeper to truly understand how each works and which one aligns best with your goals, time horizon, and risk tolerance. You can stick to one allocation or shift between them as your life and the market evolve. Reviewing your portfolio regularly rather than locking yourself into a single strategy forever can be more helpful.
If you are unsure which mix is right for you, consider consulting a financial advisor. They can help you design a strategy that balances growth and stability while offering peace of mind. Explore our financial advisor directory to connect with a qualified advisor near you who can help you select between the 60/40 and 70/30 portfolio in retirement or even some other investment mix.
Frequently Asked Questions (FAQs) about the 60/40 and 70/30 portfolio in retirement
1. What is the 60/40 rule for asset allocation?
The 60/40 rule suggests allocating 60% of your capital to equities and 40% to debt instruments. The equity portion provides growth potential, while the debt portion offers stability.
2. Is a 70/30 portfolio good?
Yes, a 70/30 portfolio can be a good option if you are seeking higher growth and can handle more risk.
3. What is the 80/20 rule of investing?
The 80/20 rule involves allocating 80% of your portfolio to equities and 20% to debt. This allocation contains a higher risk.
4. How can you choose the right investment mix?
The right mix depends on your age, risk tolerance, financial goals, and time until retirement. If you are unsure, consider speaking with a financial advisor who can assess your situation and recommend an allocation that fits your long-term objectives.
To learn more about the most suitable tax-saving strategies for your specific financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals. CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.
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