Asset Allocation for Near and Active Retirees

As you near retirement, your allocation should reflect your shorter investing horizon. In retirement you’ll begin to spend some of the income from your investments, and financial advisers generally recommend changes to your asset allocation to reflect this short term need for cash. As a result, the allocation to bonds typically increases while your allocation to stocks declines.

As we’ve discussed in earlier articles in this series, there is no one-size-fits-all portfolio. We have been looking at Richard Ferri’s recommendations in his book, All About Asset Allocation, which offers some good guidance.

In his book, Ferri suggests holding anywhere from 60% in stocks (aggressive) to 35% (conservative). The moderate portfolio, according to Ferri, would hold 50% in stocks. For Ferri’s two recommended portfolios, he takes the moderate approach. The first of these two portfolios is his basic portfolio, which uses six mutual funds and ETFs. Here it is:

Asset ClassPercentSample Low-Cost Funds and Symbols
US Equity30%Vanguard Total US Stock Market Index (VTSMX)
International Equity15%Vanguard Total International Portfolio (VGTSX)
Real Estate10%Vanguard REIT Index Fund (VGSIX)
Fixed Income45%iShares Lehman Aggregate Bond Fund (AGG)
Short-Term Bonds13%Vanguard Investment Grade Short-Term (VFSTX)
Money Markets2%Low-Cost Money Market Fund with Checking

if you want a little more control over your asset allocation, Ferri also recommends a multiple asset portfolio. It includes 14 mutual funds and ETFs, and will require more time to manage. Here it is:

Asset ClassPercentSample Low-Cost Funds and Symbols
US Equity
Core US Equity23%Vanguard Total US Stock Market Index (VTSMX)
Small Value5%iShare S&P 600 Berra Value (IJS)
Micro Cap2%Bridgeway Ultra Small Company Market (BRSIX)
Real Estate5%Vanguard REIT Index Fund (VGSIX)
International Equity
Pacific Rim - Large3%Vanguard Pacific Stock Index (VPACX)
Europe - Large3%Vanguard European Stock Index (VEURX)
Small Cap 2%Vanguard International Explorer Fund (VINEX)
Emerging Markets2%DFA Emerging Markets (DFEMX)
Fixed Income
Investment-Grade10%iShares Lehman Aggregate Bond Fund (AGG)
High-Yield10%Vanguard High Yield Corporate Bond (VWEHX)
Inflation-Protected10%Inflation-Protected Securities (VIPSX)
Emerging Markets5%Payden Emerging Markets Bond (PYEMX)
Short-Term Bonds13%Vanguard Investment Grade Short-Term (VFSTX)
Cash
Money Markets2%Low-Cost Money Market Fund with Checking

Now, if you are really paying attention, you’ll notice a problem with the multiple asset allocation. Give up? When you add up the allocations, it only gets you to 95%! Well, nobody’s perfect, and I’m pretty sure Ferri would add the other 5% into the Fixed Income category, and my guess would be to put it in the Investment-grade fund. Otherwise, sit back, relax, and enjoy retirement.

Published or Updated: April 4, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Al Brockman says:

    Hi – I don’t know when Ferri wrote his book but my guess is that these asset classifications had lower correlations both among themselves and compared to the S&P 500. I thought that a key element of asset allocation was diversification with there being low correlation among asset classes. Any comments on this element of asset allocation?

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