THE CASE FOR STOCKS in a retirement portfolio

These illustrations may strike many investors as equity heavy; the equity allocations are certainly above those you’d get by following the old rule of subtracting your age from 100. But there are a few factors that arguably justify the stock allocations. First, a longer retirement means protecting purchasing power over a longer period. Equities have historically been better than bonds at protecting purchasing power . Second, while equities aren’t cheap, particularly in the United States, they are much less expensive than bonds. With the interest rate on a 10-year government bond at roughly 2.3 percent, after-tax inflation adjusted returns may well be negative.

CONSIDER More International Exposure

Outside of a larger position in equities, the allocation to international stocks in the sample retirement portfolios is about a third. Again, this may strike some as high, and it’s certainly higher than many U.S. investors are accustomed to having. Still, it’s modest when compared to the position of international equities in global benchmarks. Also, international stocks are, for the most part, cheaper than domestic ones, and a large body of evidence demonstrates that

EXPLORE Greater Diversity of Bonds

Finally, the illustrative bond portfolios contain a broader selection of instruments than you might expect. This reflects both the increasing risk of long-dated government bonds—as rates drop, duration or rate sensitivity has risen—and the fact that traditional bonds have never been more expensive.

CAST A WIDER NET AND RETHINK CASH

Russ and Personal Investor Strategist Heather Pelant take a closer look at cash, examining the effects of having too much (or not enough) in your retirement portfolio and how to strike the right balance for your needs.

The bottom line: The new retirement is one that involves long-term planning and savings coupled with a willingness to consider different types of investments and new approaches to asset allocation.

 

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.