The old rule of thumb used to be that you should subtract your age from 100 - and that's the percentage of your portfolio that you should keep in stocks. For example, if you're 30, you should keep 70% of your portfolio in stocks. If you're 70, you should keep 30% of your portfolio in stocks.
What is the safest investment for seniors? Treasury bills, notes, bonds, and TIPS are some of the safest options. While the typical interest rate for these funds will be lower than those of other investments, they come with very little risk.
“Investors who reach an advanced age of 75 and above experience much lower returns than younger investors,” they note. From a review of the academic literature, they conclude: “returns are lower among younger investors, peak at age 42, and decline sharply after the age of 70.”
The investment type that typically carries the least risk is a savings account. CDs, bonds, and money market accounts could be grouped in as the least risky investment types around. These financial instruments have minimal market exposure, which means they're less affected by fluctuations than stocks or funds.
The average income of Canadian retirees
The after-tax median income is $61,200. This income comes from a variety of sources, like the ones mentioned.
For years, a commonly cited rule of thumb has helped simplify asset allocation. It states that individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities.
If you're looking to grow your portfolio throughout retirement while maintaining some semblance of conservativeness, consider a Money Market Account, mutual fund, preferred stock, life insurance, CD, or treasury securities.
Many financial professionals recommend that you account for between 70% and 80% of your pre-retirement income each year in retirement. This means that if you currently earn $60,000 per year, you should plan to spend between $42,000 to $48,000 annually once you retire.
Consider Your Social Security Full Retirement Age
Once you have turned your full retirement age, there is no limit on how much you can earn while collecting Social Security payments. Your full retirement age is based on the year you were born.
Most financial experts end up suggesting you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000. Personal finance guru Suze Orman advises an eight-month emergency fund because that's about how long it takes the average person to find a job.
The two primary sources of government retirement income are from the Canada Pension Plan (CPP) and Old Age Security (OAS). It's a bit tricky to estimate your exact CPP payments, but know that while the maximum you can receive is $1203.75/month, the average is closer to $619.68/month (2021 payouts).
Canadian retirement accounts have more generous contribution limits and fewer distribution limits than American accounts. Canada's pension plan for seniors, Old Age Security, is funded by general tax revenues, while America's Social Security is funded by payroll taxes.
Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for bank accounts or the National Credit Union Administration (NCUA) for credit union accounts.
If you're 65, around 35% of your money should be in the stock market, though of course this will vary depending on personal circumstances and risk tolerance. It's also important to pick the right stocks, though. It probably doesn't make sense to chase big returns from trendy tech stocks like younger investors do.
A Common-Sense Strategy. A common-sense strategy may be to allocate no less than 5% of your portfolio to cash, and many prudent professionals may prefer to keep between 10% and 20% on hand at a minimum.
Rule of Thumb for Asset Allocation based on age of investor
You can use the thumb rule to find your equity allocation by subtracting your current age from 100. It means that as you grow older, your asset allocation needs to move from equity funds towards debt funds and fixed income investments.
Given the S&P 500's average 10% annual return, an up-front investment of $500,000 can turn into more than $8.7 million by the time you're ready to retire. That's even if you never put another penny into the account.