Historically low interest rates over the past several years have led to fundamental changes in retirement portfolios. In the past, many retirees relished the fact they were able to live on the investment returns generated by primarily investing in safe fixed-income sources. However, retirement portfolios can no longer be constructed in the same manner as they were in years past. A new report, Retirees Can No Longer Afford To Live On Fixed-Income Investments, from S & P Capital IQ and SNL Research quantifies the impact of historically low bond yields on the ability of retirees to live off of fixed income investments. According to the report, retirement portfolios today, as compared to 40 years ago, need roughly four times the amount of money in order to generate the same amount of low-risk investment income. Many pundits are lamenting the fact that these low interest rates have forced seniors to increasingly put their retirement funds in risky assets at the expense of more staid fixed income investments.
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So what is the optimal allocation between stocks and bonds? Unfortunately, there is no simple answer as it depends on your age, risk tolerance, and current market conditions. For many years, the rule of thumb for asset allocation in a retirement portfolio was 100 minus your age. That is, if you were 40 years old, conventional wisdom dictated that you should have 60% of your assets in equities and the other 40% in fixed income. In essence, as you age you gradually should divest of equities and invest in fixed income securities.
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