What Is the Optimal Stock-Bond Allocation for Retirement?
A Personalized Approach to Stock-Bond Allocation
How much of your retirement portfolio should be invested in stocks versus bonds? Traditional approaches, such as a 60/40 portfolio, age-based rules, or target-date funds, provide useful starting points. But they don't necessarily identify the allocation that best supports your retirement goals.
LadderUp takes a different approach. It starts with your desired retirement income, the amount you want secured against market risk, and your flexibility around retirement timing. Stocks provide growth potential, while TIPS ladders convert accumulated wealth into secured future income. The model determines when and how much to allocate to each based on your individual circumstances.
The result is a personalized allocation strategy that evolves with your retirement readiness and market conditions.
What Is the Best Stock-Bond Allocation for Retirement?
There is no single allocation that works for every retiree. Age and financial resources matter, but so do three retirement objectives.
- Income security. How much future retirement income should be protected from market downturns before you are comfortable retiring?
- Income growth. How much potential growth do you want to pursue by keeping assets invested in stocks?
- Retirement timing. Could you work longer after poor markets, or is retiring near a particular age a priority?
These objectives create real tradeoffs. A household that values income security may need to work longer, lower its income goal, or transfer more wealth into income-securing assets. A household willing to accept more uncertainty may retire earlier or retain greater stock exposure.
The allocation should also change over time. A long horizon generally makes stock exposure more valuable because the investor has more time to benefit from growth and recover from losses. As retirement approaches, there is less time to recover and more value in protecting the income the portfolio can already support.
Market performance matters too. After strong stock returns, a household may be able to secure more of its desired income without giving up much remaining growth potential. After a market decline, securing the same income could consume a much larger share of the portfolio. Even when goals do not change, the appropriate allocation can.
Why Traditional Stock-Bond Allocation Rules Fall Short
Traditional strategies help investors diversify and manage volatility, but they have two limitations for retirement planning. They do not fully reflect individual retirement objectives, and they do not directly measure how much future retirement income is protected.
Predetermined rules overlook individual goals
Traditional allocation strategies generally manage investment risk by adjusting the proportion of stocks and bonds. A 60/40 portfolio maintains a fixed allocation, while age-based rules and target-date funds gradually shift investments toward bonds as retirement approaches.
These approaches provide useful guidelines, but they do not directly connect the allocation decision to an individual's retirement income and security objectives. Nor do they systematically adjust the allocation based on how much retirement income the portfolio can already support.
A bond allocation is not the same as secured retirement income
Bond funds and ETFs can reduce portfolio volatility, but they do not guarantee the income available to fund future expenses. Their market values fluctuate with interest rates, meaning a retiree who needs to sell shares after rates rise may realize a loss. Investor.gov notes that bond funds are subject to interest-rate risk; when rates rise, the market value of bonds owned by a fund generally falls.
A liability-driven approach gives fixed income a more specific purpose. Rather than simply reducing portfolio volatility, it uses individual Treasury Inflation-Protected Securities (TIPS) to match future retirement spending needs. When TIPS are held to maturity, changes in their market prices do not alter the inflation-linked payments the Treasury is obligated to make. By matching these payments to anticipated expenses, investors can reduce their dependence on future market conditions.
The objective shifts from reducing portfolio volatility to protecting the retirement income that the portfolio is intended to provide. The shorter guide to stocks and bonds in the LadderUp model explains the LadderUp mechanics in more detail.
The LadderUp Approach to Retirement Income
Retirement savings ultimately need to fund spending. LadderUp therefore starts with a desired, inflation-adjusted income and determines how growth assets and income-securing assets can support it.
Retirement as a liability-driven investment problem
Suppose a household wants $100,000 of annual retirement income in today's dollars. That goal can be viewed as a series of future obligations: an inflation-adjusted payment in the first year of retirement, another in the second year, and so on throughout the planning horizon.
Under this framework, retirement resources serve two distinct purposes:
- Growth: primarily stocks, seek to build wealth and increase future income capacity.
- Retirement Income: A TIPS ladder and Social Security provide secure retirement income streams.
LadderUp gradually converts growth assets into a TIPS ladder as the household approaches retirement. Unlike traditional age-based glide paths, the timing and size of these investments depend on the household's resources, investment performance, retirement income goals, and desired level of income security.
Using TIPS ladders to secure retirement income
A TIPS ladder converts part of the investment portfolio into future inflation-adjusted payments. By combining securities with different maturities, investors can align principal and interest payments with anticipated retirement expenses. This transforms accumulated wealth into a more predictable stream of retirement income.
Balancing income security and growth
Stocks serve as the growth engine of the portfolio, while TIPS ladders convert accumulated wealth into secured retirement income. The key decision is when, and how much, to shift from growth assets into income-securing investments.
LadderUp determines the timing and size of these investments for each individual, balancing opportunities for future income growth against the value of securing retirement income today. The objective is to avoid both extremes: investing too conservatively and sacrificing valuable growth opportunities, or remaining too aggressive and exposing retirement income to unnecessary downside risk.
When investments perform well, LadderUp can convert part of those gains into additional TIPS, increasing secured retirement income. Subsequent stock market declines do not erase the future payments already secured by the ladder. This creates an income ratchet that allows retirement income security to increase over time.
The Security Ratio Measures Retirement Readiness
LadderUp measures the protected share of retirement income capacity with the Security Ratio.
- Secured income is annual income supported by a TIPS ladder and Social Security.
- Income capacity is the total inflation-adjusted annual income the household could support if its available assets were converted into retirement income, including income already secured.
- Security Ratio is secured income divided by total income capacity.
Suppose investments and Social Security could support $100,000 in annual income. If $70,000 is already supported by Social Security and a TIPS ladder, the Security Ratio is 70%. The remaining 30% represents income capacity that has not yet been secured against future market declines.
That does not mean the household can spend only $70,000. The portfolio may support the full $100,000 today. The distinction is that only $70,000 has been protected from future market declines under the model's assumptions.
One household might want 80% of its income capacity secured before retiring. Another might accept 30% and retain more assets for growth. Neither target is universally better. Each represents a different tradeoff between income protection, future growth, and retirement timing.
How LadderUp Determines the Allocation
LadderUp uses Monte Carlo simulations to evaluate investment strategies across a wide range of potential market outcomes. Given a household's desired retirement income and target Security Ratio, the model seeks an allocation strategy that supports the earliest feasible retirement while satisfying both retirement readiness conditions.
Retirement readiness requires two conditions:
- The household has enough income capacity to support its desired retirement income.
- The household has secured at least the proportion of income specified by its target Security Ratio.
Rather than assuming a predetermined retirement age or allocation glide path, the model determines when the household can retire and how its investments should evolve to support that outcome.
The strategy also adapts after retirement. Remaining stocks can fund additions to the TIPS ladder when markets perform well, allowing secured income to increase over time. The resulting allocation responds to the household's goals and market conditions rather than following a predetermined glide path.
How Does LadderUp Compare With a Traditional 60/40 Retirement Strategy?
The following example compares LadderUp with a traditional 60/40 portfolio paired with a Guyton-Klinger-style withdrawal rule. Under the traditional strategy, retirement begins when the portfolio can support the desired income using a 4% initial withdrawal rate, followed by 10% spending adjustments under the guardrail rules. Both strategies face the same simulated market environments.
These examples are designed to compare retirement outcomes, not to claim that one strategy will outperform in every market. The results depend on assumptions about returns, interest rates, contributions, retirement horizons, Social Security, and spending rules.
Example: A 45-year-old planning for retirement
| Retirement planning input | Value |
|---|---|
| Starting age | 45 |
| Current portfolio | $500,000 |
| Annual contributions | $40,000 |
| Desired retirement income | $150,000 |
| Target Security Ratio | 30% |
This household accepts meaningful market exposure in exchange for earlier retirement and income growth potential. LadderUp maintains growth exposure while progressively securing future income.
| Outcome | LadderUp | Traditional 60/40 |
|---|---|---|
| Average retirement age | 66 | 68 |
| Median income at retirement | $158,390 | $150,000 |
| Upside income at retirement | $260,378 | $203,181 |
| Lowest annual income (downside) | $135,029 | $108,515 |
| Quarters below desired income in downside scenarios | 10 | 52 |
Upside and downside outcomes are evaluated at the 75th and 25th percentiles of simulated results, respectively. The 75th-percentile outcome illustrates upside income potential: $260,378 for LadderUp, compared with $203,181 under the traditional strategy. At the 25th-percentile downside outcome, the lowest annual retirement income is $135,029 versus $108,515, while income falls below the $150,000 target for 10 quarters compared with 52 quarters. These results illustrate both the potential for higher retirement income and the reduced severity and duration of income shortfalls.
In this example, LadderUp supports retirement two years earlier on average while delivering stronger income protection and upside potential through its combination of growth assets and secured retirement income.
Two familiar allocation rules provide useful benchmarks: a fixed 60/40 portfolio and the age-in-bonds rule, which increases bond allocations as investors age.
Neither rule accounts for an individual's retirement income and security objectives. In this example, LadderUp maintains substantially greater stock exposure early in the plan, before progressively increasing its TIPS allocation. The resulting allocation crosses the traditional 40% bond benchmark around age 69, while the age-in-bonds rule would prescribe a more conservative allocation throughout most of the planning horizon.
What makes a better retirement strategy?
The best retirement strategy isn't necessarily the one that maximizes investment returns or produces the largest ending portfolio. It's the one that best supports the retirement income, security, and timing objectives that matter to the individual.
LadderUp puts these objectives at the center of retirement planning. By determining when to convert growth assets into secured income, it creates a personalized investment strategy designed to support both retirement income growth and downside protection.
The interactive retirement model allows you to explore how different income goals and security preferences affect your retirement strategy.