What Should Your Asset Allocation Really Be? Age, Risk, and Income Explained
- Kirk Reagan
- Feb 11
- 7 min read
Updated: Feb 12
One of the most common questions investors ask is deceptively simple: What should my asset allocation be? It is a question that feels like it should have a precise answer. A percentage. A recommended mix of stocks and bonds. Something definitive that removes uncertainty and allows you to move forward with confidence.
The investing industry has encouraged this way of thinking for decades. Age-based rules, model portfolios, and tidy pie charts all reinforce the idea that asset allocation is largely a technical decision. Plug in a few variables, follow a formula, and everything else should take care of itself.
In practice, this approach often leads investors astray.
Asset allocation is not primarily a math problem. It is a personal strategy shaped by how and when you will use your money, how much flexibility you have when markets decline, and how you behave emotionally when volatility shows up. Two people with the same age and the same portfolio balance can require very different asset allocations because their lives, income sources, and tolerance for uncertainty are not the same.
Understanding that difference is the first step toward building a portfolio that actually works.
The Three Primary Drivers of Asset Allocation
When you strip away the noise, most asset allocation decisions are driven by three core factors. The first is your runway length, which is the amount of time you have before you need to begin taking withdrawals from your portfolio. The second is risk, which includes both your ability to absorb losses financially and your willingness to tolerate volatility emotionally. The third is guaranteed income, meaning income sources that continue regardless of what markets are doing.
These three elements are deeply interconnected. Looking at any one of them in isolation can lead to an allocation that looks reasonable on paper but fails under real-world conditions.
Why Age Alone Is the Wrong Starting Point
Age is often treated as the primary determinant of asset allocation. Younger investors are encouraged to take more risk, while older investors are advised to be more conservative. While there is some truth in that framework, it is incomplete and often misleading.
What matters far more than age is timing. Specifically, when will the funds be spent?
A 22-year-old who does not plan to touch their investments for forty years has an enormous runway. Market downturns are uncomfortable, but they are temporary, and time allows for recovery. That investor can afford volatility because withdrawals are far in the future.
Now consider someone who is 40 years old and planning to retire at 41 under a FIRE strategy. Despite being relatively young, their portfolio is about to become an income source almost immediately. From a risk perspective, that investor looks far more like a retiree than a young accumulator.
The opposite can be said of an 80 year old who doesn't plan to take any distributions and plans to give them to his 30 year old grandchildren. Well the grandchildren may be planning to not take distributions for another 35 years! So despite the 80 year old age, those funds have a 35 year runway.
Markets do not care how old you are. They care when withdrawals begin. The closer you are to taking money out, the more damaging early losses can become.
Understanding Sequence of Return Risk
This is where sequence of return risk enters the picture. Sequence risk refers to the order in which investment returns occur, particularly in the early years of withdrawals. Negative returns early in retirement can permanently impair a portfolio, even if long-term average returns appear acceptable.
When withdrawals coincide with market declines, investors are forced to sell more shares at lower prices. Those shares are gone forever, which means there are fewer assets left to participate in the eventual recovery. Over time, this can dramatically shorten the life of a portfolio.
This risk is largely irrelevant during accumulation years, but it becomes critical once withdrawals begin. That is why the timing of withdrawals matters more than age itself when determining asset allocation.
Flexibility Is an Underrated Risk Reducer
One of the most overlooked components of asset allocation is flexibility. Flexibility shows up in many forms, but it always serves the same purpose: reducing pressure on the portfolio during difficult periods.
Younger investors often have the ability to return to work if markets perform poorly. Even part-time or temporary income can dramatically reduce the need to sell assets during downturns. That flexibility allows for a more aggressive allocation because the portfolio is not the sole source of support.
Flexibility also exists on the spending side. Investors who can reduce discretionary spending during down markets have more room to tolerate volatility. Those with rigid expenses do not. Asset allocation should reflect this reality. A portfolio that appears aggressive on paper may be entirely appropriate for someone with adaptable income and expenses, while the same portfolio could be dangerously risky for someone without those options.
Risk Capacity vs Risk Tolerance
Risk is often treated as a single concept, but in reality it has two distinct components. Risk capacity is financial. It answers the question of how much loss your portfolio can absorb without jeopardizing your plan. Risk tolerance is emotional. It reflects how you react when markets decline and whether you can stay disciplined when volatility appears.
These two are frequently misaligned. Some investors have the financial ability to take significant risk but struggle emotionally during market downturns. Others are comfortable with volatility but do not have the financial margin to absorb large losses.
Problems arise when portfolios are built around one dimension while ignoring the other. A portfolio that exceeds an investor’s emotional tolerance is unlikely to be maintained during stress. The most dangerous portfolio is not the one with the highest volatility, but the one that an investor abandons at the wrong time.
What the Money Is Used For Matters
Another often overlooked factor is the purpose of the money itself. Portfolio risk feels very different depending on what withdrawals are funding.
Money that pays for housing, food, and utilities carries a different risk profile than money earmarked for travel or lifestyle upgrades. Volatility becomes far more stressful when it threatens essential expenses.
Asset allocation should reflect this distinction. Mandatory expenses typically require greater stability, while discretionary spending allows for more flexibility. Ignoring this difference can lead to an allocation that feels manageable in theory but becomes overwhelming in practice.
Guaranteed Income Changes the Equation
Guaranteed income is one of the most powerful and underappreciated influences on asset allocation. Pensions, Social Security, VA disability benefits, and similar income streams fundamentally change how much risk a portfolio can take.
An investor with a large percentage of mandatory expenses covered by guaranteed income has far more flexibility. Withdrawals from the portfolio can be reduced or skipped entirely during down markets, allowing time for recovery. That flexibility supports a higher risk tolerance and a potentially more growth-oriented allocation.
By contrast, an investor who relies heavily on portfolio withdrawals to meet basic expenses has far less room for error. For them, stability may matter more than maximizing long-term returns.
Two investors with identical portfolios can require very different asset allocations based solely on income stability.
The Hidden Risk of Being Too Conservative
Many investors equate conservatism with safety, but this assumption can be dangerous. One of the most persistent risks in investing is inflation.
Holding large amounts of cash or cash equivalents may feel reassuring, especially when interest rates are elevated. However, comfort does not equal protection. If inflation is running at three percent and withdrawals are four percent, the portfolio must earn at least seven percent just to maintain purchasing power.
Cash yielding three or four percent may appear stable, but after accounting for withdrawals and inflation, real value can decline year after year. Over time, this erosion can be just as damaging as market volatility, only quieter and easier to ignore.
The Cost of Being Too Aggressive
On the other end of the spectrum, excessive aggressiveness introduces its own risks. Large market declines early in retirement can permanently impair a portfolio when withdrawals are required.
A significant loss combined with a fixed withdrawal rate means selling more shares at depressed prices. This increases the effective withdrawal rate and accelerates portfolio depletion. Even if markets recover later, the damage has already been done.
History offers many examples where retirees who experienced poor early returns ran out of money far sooner than those who retired just a few years later, despite similar long-term averages. Timing matters, and asset allocation exists to manage this risk, not eliminate it.
Model Portfolios Are Starting Points, Not Solutions
Model portfolios and glide paths can be useful educational tools, and firms like Vanguard provide helpful frameworks for understanding broad risk ranges. However, these models are not personalized solutions.
They do not account for guaranteed income, spending flexibility, tax structure, debt, or human behavior. Used without context, they can create a false sense of security and encourage investors to overlook risks that are unique to their situation.
Other Factors That Shape Real-World Asset Allocation
In practice, asset allocation must also account for a wide range of additional factors. Real estate income can reduce reliance on portfolio withdrawals. Part-time work or consulting can extend a portfolio’s runway. Tax location matters, as assets behave differently in taxable, tax-deferred, and Roth accounts. Debt obligations reduce flexibility and increase vulnerability during downturns. Concentrated positions, such as employer stock, introduce risks that are often underestimated. Temporary income gaps, such as the years between retirement and Social Security, may require higher short-term withdrawals. Even pensions without cost-of-living adjustments can gradually shift more income responsibility onto the portfolio as inflation erodes purchasing power.
Each of these elements changes how much risk a portfolio can responsibly carry.
The Bottom Line
Asset allocation is not about finding a perfect percentage. It is about building a strategy that aligns with your life, your income, your flexibility, and your behavior.
The goal is not to maximize returns in isolation. It is to create a portfolio that can survive poor markets, changing circumstances, and human emotion. The best portfolio is not the one that looks best in a spreadsheet. It is the one you can stick with, adapt when necessary, and rely on over time.
When asset allocation is approached this way, the numbers start to make sense. Until then, no rule of thumb will ever be enough.
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