What is the best stock/bond allocation for someone in their late 50s?

Hi, what is the best stock/bond allocation for someone in their late 50s, hoping to retire in 5 years with drawdown in the current market? Stocks or bond funds? Obviously want growth but without too much risk to my capital.

Hi Paul,

Thanks for your question. As you might expect there is no single allocation that suits everyone in this situation, it is important to consider your unique situation and requirements: how big is your pension fund, how much income will you need each year, what other income will you have in retirement, what do you have in savings to support periods when markets fall in value, will you need to withdraw lump sums to pay off a mortgage or for other ad-hoc costs.

The fact that you intend to enter drawdown when you retire means you can consider a higher equity allocation than somebody who may be using the fund to purchase an annuity. However, it is easy to discount annuities without fully considering whether they have a role to play in your retirement income in full or in part. For example, using some of the fund to purchase an annuity to cover essential costs is an option some choose to take.

Assuming full drawdown is appropriate for you the mix of stocks to bonds then becomes a balance of the risk you are willing to take, need to take and are able to take.

The first part, the risk you are willing to take comes down to your psychological risk profile (how comfortable or not you are with being exposed to investment risk). The second part is the risk needed to generate sufficient growth to support the income you withdraw from the pension for the remainder of your life (or until you decide to purchase an annuity). The final part is what the Financial Conduct Authority refer to as 'capacity for loss'. What this means is do you have sufficient capital to sustain falls in value in your pension fund without detriment to your financial security in the short and long-term? This is why having savings to fall back on in times of stock market falls is important.

The balance then comes down to taking sufficient risk to enable the fund to grow above inflation and support income, but not so much that significant market losses have a detrimental effect on your wealth (or such that you get panicky and sell at the wrong time). Some advisers will argue that because stock markets go up more than they go down, and the long-term trend is positive, it is appropriate to have a high equity allocation if you are looking at a multi-decade retirement. I understand this point of view, but if you don't have the capacity to suffer significant short-term losses (exacerbated by withdrawals) and because human behaviour during times of market turmoil can have a significant negative impact (i.e. panicking and selling out at the bottom), I wouldn't warrant taking more risk than you would be comfortable with.

To distil it down to a ratio, I would say anything less than 40% in equities is probably too low to support long-term income withdrawals and growth and more than 70% may impact capacity for loss and/or cause too much panic in times of turmoil. In my experience I would suggest most drawdown investors are a 50/50 split or 60% equity to 40% bond.

I hope this helps answer your question but please bear in mind that your own unique circumstances need to be taken into account.

Kind regards

Andrew