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Utilizing the 60/40 Portfolio Strategy for Retirement Income

When it comes to retirement income (or any income for that matter) it may feel like you can never have enough. However, according to research conducted by Boston College, 50 percent of retirees are at risk of not having enough income to sustain their lifestyle past employment.1 While the average retirement income has increased, this could be in part due to seniors staying at their jobs longer than in previous years. 

This statistic is supported by The Pension Rights Center’s report that “half of all Americans age 65 or older have incomes of less than $24,224 a year,2” a number that could be considered well below the amount needed to pay for expenses throughout one’s retirement years. And while the Social Security Administration did perform a cost of living adjustment in recent years, (which led to an approximate three percent increase in average monthly Social Security income)3, most experts now agree that no pre-retiree should plan to rely exclusively on Social Security for income in retirement. 

When planning for income in retirement, a common strategy used by investment professionals is the 60/40 approach. This strategy refers to a plan for how your wealth will be invested -  an allocation of 60 percent stocks and 40 percent bonds, hence the name 60/40. These types of funds (also often referred to as "balanced funds") spread your money across a diversified portfolio containing both stocks and bonds, as well as come with their own unique advantages and disadvantages.

Pros of Investing in Balanced Funds 

When it comes to investing in balanced funds, diversification is a key appeal of the approach. For example, instead of having to pick single or multiple stock and bond funds, you can simply purchase one fund, which then be composed of a stock and bond mix. Not only do you minimize your costs, but you also reduce your chances of selecting a stock that will not generate much of a return.

Another type of balanced fund is mutual funds. They require little knowledge upfront, as well as practically no decision-making on your end. Your main responsibility is to decide whether or not you want to put your money in or take your money out of the fund; the management team overseeing the fund handles the rest. 

Mutual funds may be appealing for individuals interested in the 60/40 approach because they usually don’t require a large sum of money to invest. However, before investing in a mutual fund, it’s recommended to research their expenses and then select the funds that have lower than average fees in order to keep your overall costs low. 

Another benefit of utilizing balanced funds for retirement income is systematic withdrawals that enable you to maintain your 60/40 allocation rather easily. For those who have one account to draw from, such as an IRA, balanced funds may be worth the investment.

Cons of Investing in Balanced Funds 

As with anything, there may be drawbacks to investing in balanced funds. For example, in some cases, your costs (fees) may be higher for a balanced fund when compared to individual index funds because selecting the optimal mix of stocks and bonds is the fund management team’s responsibility instead of your own. And as you might guess, when investing using balanced funds, you will not have the opportunity to select how much is in what type of stock — such as small- or large-cap — or what type of bond — such as high yields, corporate or government. 

Additionally, with growth in your portfolio also comes the potential desire to locate bonds within your tax-deferred retirement accounts and locate stocks in your non-retirement brokerage accounts. However, this is not an option with balanced funds as the same fund will own both bonds and stocks.

Select the Strategy that Suits Your Needs the Best 

While balanced funds and the 60/40 portfolio strategy is a favorite among many investors, it is not the only option out there. For those interested in this approach, it’s important to consider the implications of investing in balanced funds. Regardless of which strategy you select, make sure that you’re not solely relying on investments for your retirement income. While investments can potentially generate high returns, they are definitely not the only vehicle for generating retirement resources.

As always, consult with an investment professional to determine which asset allocation strategy best suits your unique needs and goals. After discussing these details — as well as your target risk tolerance and timeframe — they can help you pinpoint the approach that best aligns with your investment personality. As things change, it’s always a good idea to revisit your strategy and see if a more suitable approach would better complement your goals for your retirement.

1https://crr.bc.edu/special-projects/national-retirement-risk-index/

2http://www.pensionrights.org/publications/fact-sheet/why-people-need-pensions

3https://www.ssa.gov/news/press/factsheets/colafacts2019.pdf

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