Investment Planning and Asset Allocation for Retirement
Allocation is driven by more than age
Asset allocation blends capital market assumptions, time horizon, risk tolerance, and risk capacity. Human capital, the present value of future earnings, matters: a young client with a stable salary can hold more equity, while a client approaching retirement with a pension-like income stream already has bond-like human capital. A retirement spending horizon of 25 to 35 years means a bond-heavy portfolio at retirement carries real inflation risk.
Glide paths and target-date funds
Target-date funds de-risk along a glide path toward the target year, but the slope varies widely by provider (through-retirement versus to-retirement). Traps: assuming the fund's target date matches the client's actual retirement date, and ignoring the underlying expense ratio and the fund's equity allocation at the target year.
Traps
- Confusing asset location (which account holds which asset) with asset allocation (the overall mix).
- Ignoring inflation protection; TIPS, equities, and real assets all play roles.
- Extrapolating recent returns into forward-looking capital market assumptions.
- Failing to rebalance, allowing equity drift to push risk above the plan's tolerance.
- Assuming diversification holds in a crisis, when correlations tend to rise.
Rebalancing rule of thumb and worked example
Use rebalancing bands of plus or minus 5 percentage points on a major asset class. A 60/40 portfolio of $1,000,000 becomes $660,000 equity and $340,000 bonds after a strong equity year, a 66% equity weight. That breaches the 65% upper band, so sell about $60,000 of equity and buy $60,000 of bonds to restore $600,000 and $400,000.