It takes years to accumulate and grow your nest egg with disciplined saving and investing to an amount where you finally feel comfortable hanging up your spurs and starting the next phase of your life, Retirement.  Now you are about to start ticking off the items on your bucket list; perhaps traveling with family to amazing destinations, pursuing your passion in music or the arts or volunteering with some non-profit organizations. Your portfolio, on the other hand, must continue to work hard for you in order to last at least your lifetime, and that can be 30 years or more.  

In this post, I would like to share what I think you should consider to review your portfolio and make adjustments as needed.

Although it's hard to go very wrong with a simple 50% stock/50% bond mix, there aren't any one-size-fits-all asset allocations for retirement portfolios. An individual's age, retirement income such as social security and pension income, withdrawal rate, and risk profile, among other factors, can all dictate higher or lower equity or bond weightings.  

1. Allocation to Equity (stocks).  Assume that you have an average appetite for risk, you can take your age, subtract from 110 to determine how much of your portfolio should remain in stocks.  For example, if you are age 65, then allocate 45% to equity and 55% to bonds and cash. If you have longevity gene in your family history and your personal life expectancy is over age 90, consider using 120 instead of 110 to calculate your equity allocation.  As a general rule, you don't want to have too much money tied up in cash, and while you most definitely need an emerging fund going into retirement, that money should be in its own separate account.
   
   Of course, the above formula isn't perfect, and can be tweaked as necessary to accommodate your personal circumstances. But it's a reasonable starting point for determining how to allocate your assets.
2. Allocation to Foreign Equity vs. Domestic Equity.  People tend to have home biases in that we feel more comfortable with the stocks in our own country.  However, to maximize risk-adjusted return over time, it's important to consider including Non-US Developed Markets and Emerging Markets, especially when U.S. stocks have had a bull market for almost a decade and the valuation (measured by forward P/E ratio) of foreign stocks is lower than the long-term average.  The U.S. stock market capitalization is about 53% of the entire world, and you may choose to allocate as high as 30% to foreign stocks if you allocate 40% to US stocks in your portfolio. At the minimum, consider allocating 10% to 15% of your retirement portfolios to foreign stocks.
    
3. Don't Confuse Risk Tolerance with Risk Capacity.  As you reassess your risk tolerance by using some online tools such as Riskalyze, you can determine your risk number, an analysis that shows the range of returns of your portfolio over a six-month period (short-term volatility) with 95% probability.
   
   Risk capacity refers to the losses you can handle without having to dramatically change your retirement plans. For retirees who encounter big losses in equity portfolios that they're actively spending from, the net effect is that less of their portfolios are in place to recover when stocks eventually do. This can be a big problem for a portfolio's longevity, especially if those losses occur early in the retiree's time horizon.  
   
   A comprehensive financial plan that shows detailed cash flow report year-by-year during retirement may provide you better charity on how much you can afford losing.  In addition, reexamine your living expenses to determine the required expenses and discretionary expenses. If you have a substantial amount of discretionary expenses, you can choose to reduce them (take one instead of three overseas vacations per year) when your portfolio suffer losses, therefore, you can afford higher risk.  
    
4. Your Own Behavioral Track Record.  Did you dramatically change your portfolio suddenly when stock markets declined sharply in the past?  If so, consider adjusting your equity allocation down a bit and your bond and cash up relative to recommended allocations for investors at your same life stage to improve the odds that you'll stick with this asset allocation in periods of volatility. Just remember that a more-conservative portfolio may require changes elsewhere in your plan--for example, the lower your equity weighting, the lower your withdrawal rate should generally be to make the portfolio last your lifetime.
    
5. Pension and Social Security Income.  If you don't include non-portfolio income such as pension income and social security income, you may overweight bonds and cash.  Don't forget to include this future income in your financial plan to calculate the required withdrawals from your retirement portfolio.  In addition, do a thorough social security analysis to determine your optimal age to collect pension and social security allocations. By delaying starting your social security income, your monthly benefit can increase by 8% per year until age 70.  After you have considered various factors including life expectancy, rate of return, inflation and spousal benefit, etc., you and your advisor may conclude that you would be better off delaying social security income and starting withdrawing from your portfolio instead.  In that case, you must allocate more to bonds and cash for a few years based on your withdrawal needs.
   
   Though most pre-retirees are advised to start shifting their assets into less-risky investments, like bonds, if you happen to have a higher-than-average appetite for risk, you might maintain a more stock-heavy portfolio. The same holds true if you have a solid backup plan for generating some retirement income, such as a side business you plan to focus on once you leave your full-time career behind. This way, if your investments take a hit early on in retirement, you can leave them in place to recover and sustain yourself with the income your venture produces.
    
6. Buy Low and Sell High.  As you cannot predict the markets' sequence of returns, how do you limit your risk during down periods? By rebalancing. Even if you have a powerful portfolio that owns various asset classes (say 40% in U.S. Large Cap Stocks), as the U.S. stock market rises in value, that slice of the total pie becomes larger.  So if U.S. Large Cap Stocks rise to 50% of the portfolio in value, you rebalance, selling off the extra gains and using the proceeds to buy more of the rest of your portfolio. This rebalancing strategy forces you to sell the winners and buy the losers which is hard to do for many investors if they don't understand the benefits including reducing risk.  
   
   That's what finance researchers mean when they say that asset allocation is responsible for about 90% of observed returns.  Market timing and security selections are responsible for about 7% of observed returns. It's not which stocks you own, it's the fact that you own a large selection of stocks and bonds (rather than cash) and take gains when they appear (by rebalancing) along the way.  
   
   Remember, a huge part of the gains we find in stocks happen over a small number of market days. Sit in cash and you miss those gains entirely.  At or near retirement, a risk-adjusted portfolio will be far less volatile than in previous years, helping you to hold on to your compounding gains.  
   
   As you review your portfolio to make rebalancing decisions, you can also review whether you may need to peel off some gains from the portfolio to replenish your emergency funds.
    
7. Goals Other Than Retirement.  If you have other goals, such as supporting charities and other people, in addition to your own retirement, you may need to have more cushion (surplus capital) for your retirement portfolio projection to ensure that you can still support these charities and the people you love (children and grandchildren).  When giving more during your lifetime may make more sense than leaving a large inheritance, you should consider including annual gifting as part of the withdrawal calculations.

In summary, you should change your asset allocation based on your own situation (including risk profile, cash flow, portfolio size and taxes) by applying sound investing principles.  Consult a trusted financial planner to review your current portfolio and your goals as you don't need to do this alone. I will continue this discussion in my next blog post by focusing on the safe withdrawal rate and the process of taking withdrawals during retirement.