At What Age Should I Begin Shifting My Portfolio More Toward Bonds?

There's a rule of thumb, but you'd be better off answering the hard questions, then doing some calculating.
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Is there a general rule of thumb when I should convert stocks to bonds after, say, age 50, or how I should prepare for retirement at age 65? I am 75% in stocks, with a mix of U.S. and international, and 25% in bonds. I am happy with my stocks. I have been in the market since 1974, and ups and downs don't cause me sleepless nights. But I know there must be a time to rethink and reposition my portfolio. -- Mary Ruksznis

Mary,

A single rule would certainly make your retirement planning and the asset-allocation process less arduous. But I'm afraid it isn't that easy.

There is one dictum that I have heard over and over again: the 100-year rule. The old saw goes something like this: Subtract your age from 100 and the remaining number is the percentage of your portfolio that you should have in the stock market.

But let's think about this. I'm 30 years old. Do I really need to have 30% of my assets in bonds? I don't think so. In some cases this rule might work. For instance, some 65-year-olds might be perfectly comfortable with 35% of their assets in equities. But deciding on an asset allocation using a generic rule like this one is like buying a pair of shoes for someone when you don't know their size, sex or personal preference. If it fits, it is only by chance and nothing else.

In most cases, there is no question you need to be more conservative as you approach or enter retirement. But again, there is no magic age at which you should suddenly start hoarding cash. Ron Roge of

R.W. Roge & Co.

in Bohemia, N.Y., says, "We have 80-year-olds who have 80% in stocks." They are planning on living until they are at least 100 and are probably thinking about their heirs, too, he adds. "The portfolio is large enough that they don't have a problem with having that kind of exposure."

Your retirement portfolio and asset allocation will depend on multiple factors, including your investment horizon and your monetary needs and desires.

First you should try to conduct a careful cash-flow analysis, forecasting your future income, expenditures and taxes. What is going to be your standard of living? How much money will you need to live on every year? Do you want to leave something for your heirs or spend it while you can? Do you have any purchases that you want to make in retirement that will improve your lifestyle? When you are calculating your asset allocation, be sure to put in a cushion, meaning don't underestimate how long you think you are going to live.

Then you will have to determine what level of return will get you to those goals vs. the risk you take on. Risk might mean a heavy exposure to the stock market or use of aggressive securities. Again, that's not an easy question. "There is no need to go more aggressive if you can achieve your goals with less risk," suggests Tim Schlindwein, a financial planner with

Schlindwein Associates

in Chicago.

Here is a simple (if somewhat loose) calculation to use once you have gauged your future living expenses and your projected life expectancy. Using

Excel

, you can figure out an annual rate of return for your investments using the rate calculation under the financial functions. You will need to know the starting balance of your portfolio, the ending balance (zero if you want), how much money you will be withdrawing every year and the number of periods (say 20 years).

This calculation doesn't factor in inflation, but it will give you an imprecise projected rate of return -- basically the amount that your portfolio will need to earn every year to meet your goals. You can then take this return and figure out what your portfolio should look like to achieve that return. For example, if you need an annual return of 10%, you can bet your portfolio is going to be heavily weighted to equities, says Schlindwein.

Then you would have to look at the kind of risks you are taking in this portfolio and if you are comfortable with those risks. That is an even more complicated discussion.

You may also want to use one of the many asset-allocation calculators available on the Internet. You can find them on many mutual fund company Web sites. I was tinkering with

Fidelity's

worksheet yesterday. It's quite useful, though it requires you to answer a lot of questions about yourself. Or you may want to talk to a financial adviser.

Once you have done your initial allocation, you may not have to rearrange your assets very often. But you should at least examine your portfolio once a year to make sure it isn't out of balance, says Roge. Any major life change (an inheritance, for example) should also spur you to review your portfolio, adds Schlindwein.

I don't know how many years you have until your retirement, but go ahead and run these calculations on your portfolio now. There is no bonus for waiting.

Send your questions and comments, along with your full name, to

deardagen@thestreet.com.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.