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For years, the 60/40 portfolio has been the go-to allocation for many retirees.
Sixty percent stocks and forty percent bonds is said to be the safe and reliable mix, but for retirees who have a pension and strong savings, this traditional retirement rule may not fit their situation.
If this sounds like your situation, you are part of a very small group of Americans that we like to call the 2% Club. Less than 20% of Americans have a pension, and about 10% have saved a million dollars or more.
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When you put those two together, you create a unique group of retirees who have both a high income and a high net worth throughout their retirement.
And when you’re in the 2% Club, the rules change — I wrote a bestselling book about it (you can request a free copy here).
Your pension reduces the pressure on your portfolio
For many retirees, their pension can provide a value equivalent to hundreds of thousands to millions of dollars over their lifetime, and it takes on a similar role that bonds usually play in a portfolio, such as:
If a retiree’s pension and Social Security already cover most of their day-to-day living expenses, their portfolio may not need to do the same job.
This often means that the “right” allocation is not 60/40 at all. It might be 80/20, 90/10 or even more growth-oriented, depending on the situation.
Understanding sequence of returns risk (and why it’s different for pension holders)
Sequence of returns risk is the danger of needing to withdraw money during a market downturn. This can create what is known as a “double loss” and can be a serious threat to retirees who rely heavily on their investments to meet daily expenses.
But for pension holders who need a much smaller draw from their investments, this risk shrinks dramatically.
An example: A retiree needs $120,000 a year, and they get a combined $80,000 in guaranteed income from their pension and Social Security benefits. This leaves them needing only $40,000 from their investments.
If they have a $2 million nest egg, that’s only a 2% withdrawal rate, far below usual sustainability guidelines, which means their portfolio doesn’t need the traditional 40% allocated to bonds. It may only need enough protection to cover multiple years of modest withdrawals.
How much should you really protect?
There are two main factors to determine how much protection a retiree may need:
1. Income needs
No income needs → You may need none of your investments protected.
Small income needs → You could think about protecting only five to 10 years of withdrawals.
With the example above, five years of withdrawing $40,000 equals $200,000, and 10 years of withdrawals is only $400,000.
In a $2 million portfolio, that means:
- $200,000 protected → 90/10 allocation
- $400,000 protected → 80/20 allocation
Not 60/40.
2. Risk tolerance
Some people just simply aren’t comfortable with the ups and downs of the market, while others may be perfectly fine seeing the market drop 20%, knowing that history shows recovery.
But pensions give retirees something most people don’t have: The freedom to choose their risk level.
How often is the market down over the past 50 years?
Looking at the past 50 years of market data, according to IFA.com:
- Daily: 51% up/49% down (essentially a coin flip)
- Monthly: 65% probability of gains
- Quarterly: 71% probability of gains
- One year: 79% probability of gains
- Five years: 97% probability of gains
- 10 years: 100% probability of gains
This is why many pension-holding retirees protect only five to 10 years of income. History shows that a long time horizon eliminates risk of withdrawing during a market downturn.
Why taking on more risk can actually increase your options in retirement
No one wants risk. If we could get 10% returns with no volatility, everyone would choose that. But the reality is that more risk equals more potential for returns. If retirees overweight protection unnecessarily, they risk leaving a lot of long-term growth on the table.
The math is striking:
- At 7%: Money doubles roughly every 10 years
- At 4%: It takes almost 20 years
What does that look like over a 20-year period?
- At 7%: $400,000 → $800,000 in 10 years → $1.6 million in 20 years
- At 4%: $400,000 → $800,000 in about 20 years
That’s a potential $800,000 difference in long-term outcomes. Will everyone with a pension need that extra $800,000? Maybe not. But it could fund charitable gifts, family legacy goals or simply provide the financial flexibility retirees worked decades to earn.
Or maybe they could spend some of that money, which is a very difficult task for our Midwestern Millionaire clients who are very frugal. 🙂 They are what we call “the best savers and the worst spenders.”
This type of planning could make them feel more comfortable doing what they want, knowing they have even more financial freedom than before.
The bottom line: Your retirement should dictate the allocation, not the other way around
If you are retired with a pension and have seven figures saved, you are not a “standard” retiree, and you don’t need a “standard” portfolio. Your pension already accomplishes part of what bonds traditionally do.
This flexibility opens the door to:
- Higher growth potential
- More control
- Ability to create more long-term wealth
- Less stress about what the stock market is doing
If you’re part of the 2% Club, take the time to design a portfolio that fits your goals, income needs and risk tolerance, and don’t follow an outdated rule of thumb.
