Your Retirement Portfolio Is Probably Too Conservative. Here’s What To Consider.

Adequately saving and investing for retirement means balancing a mix of investments that manages your risk while providing earnings. How you should spread your investment dollars across bonds, stocks, and other assets depends on your risk tolerance and how soon you plan to retire.

Although you might want to lean more heavily toward the side of caution and invest conservatively, that’s not always the best option. Discover what allocation investment managers believe is too conservative and how you can rebalance to ensure you have enough money in retirement.

The Risks of a Conservative Portfolio

Playing it safe can backfire, thanks in part to inflation, says DeeDee Baze, CFP and managing partner at DeMar Consulting Group. “Inflation never sleeps and retirements are long,” she points out. “A healthy couple in their 60s could be funding 25 to 30 years of living expenses. Inflation creeps up on you in this time. When investments don’t keep up with inflation, every dollar you spend comes from your principal, increasing the risk of running out of money late in life.”

Charles Schwab suggests a greater concentration of stocks in your portfolio rather than safe investments during the early years of retirement, as it can hedge against the possibility of outliving your retirement income. However, whatever allocation you’re comfortable with, it isn’t carved in stone, since you can rebalance to adjust as the economy, market conditions, and your financial needs change over time.

When investing for retirement, the power of compounding can play a significant role in building wealth. However, if your portfolio allocation is too conservative, it can diminish the compounding effect since you’re earning less on your interest or capital gains. As a result, lower returns can lead to less money in retirement.

Signs That Your Portfolio Is Too Conservative

Although there’s no one-size-fits-all risk management strategy, you tend to reduce your risk in your retirement portfolio as you get older. Whether your portfolio is too conservative or risky depends on how soon you will need the money and your risk tolerance.

However, you want to ensure that you’re earning enough returns. Your portfolio might be too conservative if “more than half your assets sit in cash or bonds,” Baze says. Another clue is that your balance stays the same or declines after accounting for annual withdrawals, she adds. 

Charles Schwab suggests that a conservative portfolio is one that’s allocated 20% in stocks, 50% in bonds, and 30% in cash investments, which is usually appropriate for those age 80 or over.

If you’re in your 50s, U.S. Wealth Management recommends a 60% stock and 40% bond allocation. Reversing the allocation so that you have more in bonds versus stocks might be too conservative for some in this age group.

For younger investors, a higher percentage of stocks in your portfolio may be appropriate, as you have more time to recover from market downturns and losses. Your portfolio might be too conservative if it consists primarily of cash, cash equivalents, and bonds.

Other Options to Consider

Rebalancing is typically done periodically or on an ongoing basis to optimize your retirement income. There are other adjustments you can make, too.

You can downsize to a smaller living space to free up cash from your monthly budget and invest the savings to amp up your portfolio. If you’re 50 or older, you can use the savings to make catch-up contributions to your individual retirement account (IRA).

Baze provides a few other suggestions if you’ve maintained that conservative portfolio for too long and retirement has arrived, or it’s on the immediate horizon. “Work a bit longer or pick up part-time income,” she says. “Even $10,000 a year for five years in part-time work is $50,000 less that you’ll be pulling from your savings. Turn a hobby into additional cash or rent out a room. Delay Social Security so your future checks are bigger.”