Retirement is an exciting chapter in life, but it can also be challenging to prepare. There are countless factors to consider as you're planning, and neglecting even one part of the process could spell trouble.
There's one factor, though, that is especially important. It could potentially make or break your retirement, in some cases, particularly when the stock market is volatile: asset allocation.
What is asset allocation?
Asset allocation refers to the mix of investments you have in your portfolio, and it's one of the factors that determine how much risk you're taking on.
A more aggressive asset allocation means most of your portfolio is invested in stocks, while a more conservative allocation involves putting more money behind bonds and other conservative investments.
When you're younger and still have decades before you retire, you can afford a more aggressive approach. Your investments may take a bigger hit during market downturns, but you still have plenty of time for your money to recover.
As you get older, though, your portfolio should become more conservative. In general, bonds and other conservative investments earn lower returns than stocks. However, they're also less affected by stock market volatility. This means if the market crashes just before or during retirement, your savings won't be hit as hard.
Is your asset allocation safe for your age?
Your age and risk tolerance will be the most important factors in deciding what your asset allocation should look like.
In general, the older you are, the less you should be investing in stocks. That said, even as you head into retirement, it's wise to keep at least some money in stocks, because that will help your savings continue to grow well into your senior years.
While everyone's situation will be different, one common guideline is to subtract your age from 110, and the result is the percentage of your portfolio that should be allocated to stocks. So, for instance, if you're 65 years old, you may aim to allocate around 45% of your portfolio to stocks and 55% to bonds.
Keep in mind that this is only a rough guideline, and your exact asset allocation will also depend on your tolerance for risk. If you're extremely risk-averse and are nervous about market volatility, for example, you may lean toward the conservative side and invest more heavily in bonds.
Preparing for retirement in a turbulent market
The stock market has been volatile lately, which means your asset allocation is especially important as you're planning for the future. If the market continues to worsen, having the right mix of investments can keep your retirement on track.
There's no one-size-fits-all approach when it comes to asset allocation. But finding the right balance between risk and reward can keep your savings as safe as possible while still building a robust nest egg.