Portfolio Ratio of Stocks to Bonds
One of the most commonly cited rules of thumb regarding how much of your retirement portfolio should be invested in bonds involves subtracting your age from 100. The result is the percentage of the portfolio that should be invested in stocks, and the remainder would be invested in bonds.
The concept behind this rule of thumb is that the closer a person is to retirement, the more conservative their portfolio should be. Thus, a person who is 65, and very near retirement, should be investing more conservatively than a person who is 30 and has decades to go before retirement. The idea is that the younger person has numerous years to make up any losses caused by market swings, while the older investor has little or no time to make up for such losses.
For example, using this rule of thumb, a person who is 30 years old should invest 70 percent of their portfolio in equities and 30 percent in bonds. Conversely, a person who is 65 years old should invest just 35 percent of their portfolio in stock funds and 65 percent in bond funds.
Some experts suggest that this age minus 100 rule of thumb is too conservative, especially with many retirees living longer.
Another way to determine the perfect mix of stock funds and bond funds for a retirement portfolio is to use an asset allocation calculator. These tools are available online and offer different ways to calculate the proper investment mix. For example, the free asset allocation tool offered by Bankrate.com allows you to select not just your age, but also your risk tolerance, and even how you feel the economy will do in order to calculate a specific mix of stock and bond asset classes.