Asset allocation strategies for retirement

It might feel overwhelming to start investing in your retirement plan, but investing for your retirement doesn’t have to be complicated. There are different investment strategies you can use to keep it simple, such as asset allocation. Did you know that you can use asset allocation to help balance potential investment risks and rewards in your retirement plan?

What are asset classes?

Before we jump into asset allocation and rebalancing, let’s take a step back to talk about asset classes. Your retirement plan likely offers different types of investments, also known as asset classes. You can choose how much to invest in each asset or investment class: guaranteed income, fixed income (such as bonds), and equities (also known as stocks) to build your asset portfolio (a collection of your investments).

What’s asset allocation?

Putting your money in different asset classes is called asset allocation, a strategy that can help you balance the potential risks and rewards of each investment while you save for retirement. 

Some investment types come with low risk and a relatively low potential reward, and other investment types come with more risk and more potential reward. There are also balanced funds and other ready-made funds that invest in a combination of asset classes.

Your group retirement program likely has investment options for all risk categories and age groups. 

Balancing risks and rewards in your asset allocation mix

Depending on your group retirement plan, you can create your own mix of investments that balances risks and rewards, or you can choose a fund that does it for you. 

Instead of selecting individual funds in your group retirement plan, you can select a managed asset allocation option that's made up of different asset classes. Professionally managed asset allocation options can help you outsource your investment decisions and diversify your fund mix in a single choice to help you manage risk in the market. 

A target-date fund (TDF) follows the asset allocation formula and is a mix of funds designed and managed by investment experts focused on maximizing the amount of money you have in the fund on the date you retire. All target-date funds aim to lower your investment risk over time, but no two TDFs are alike.

If you prefer to create your own mix of investments, how do you know where to start? 

Help determine which asset portfolio is right for you

Knowing your goals and your comfort with risk can help you pick the best funds for you. 

There are a couple of things you can consider to make it simpler:

  1. Asset allocation by age—Age is an important factor to consider, as you might want to rebalance your portfolio with a less risky asset allocation mix as you get closer to retirement
  2. Asset allocation by risk tolerance—The investment risk you’re willing to take and the potential growth and returns you want to get based on your retirement goals are important factors. 

If you’re not sure how much risk you’re willing to take, you could use an investor strategy worksheet to help you figure out what kind of investor you might be, known as your investor profile. 

Asset allocation strategies

Once you know your investor profile, it’s time to choose your asset allocation mix. 

Your asset allocation mix can be chosen from asset classes that offer a risk/return potential that corresponds to your goals:

  • Guaranteed income means just that, it’s guaranteed and usually has a lower risk/potential return. 
  • Fixed income is somewhere between guaranteed income and equities, with a middle risk/potential return.
  • Equities have a higher risk/potential return, as they can be more volatile but can provide higher returns than other assets in most cases.

Why do you rebalance a portfolio?

Congratulations, you’ve figured out your investment allocation! But wait—you’re not done yet. Each portfolio is designed for a specific risk tolerance and return objective. What happens if your risk tolerance or your goals change? It might be time to rebalance. 

You should consider rebalancing your portfolio when your life situation changes. Update your investor profile and reevaluate if you have the right mix of risk and reward for your future. As you get closer to retirement, you might want to move to a less risky asset allocation mix if you're in one of the riskier profiles. Ready-made target-date funds and asset allocation portfolios are automatically rebalanced by the fund manager. 

You can’t predict the risks that cause market volatility, but you can be prepared for them. Even if you have a professionally managed fund, consider monitoring your investments on a regular basis to make sure you’re on target for your goals and you’re comfortable with the level of risk in your portfolio.

What’s the right allocation mix?

There’s no right or wrong answer. In the end, it’s all about you and your goals. 

The right asset allocation strategy might be the one that helps you stick to your long-term goals and stay invested amid market volatility.

If you need help, talk to a licensed financial advisor who can help you get into a diversified portfolio in an asset allocation option. 

The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.