Stocks provide growth while bonds provide income. Stocks tend to be volatile, so the stock portion of your portfolio can gain and lose value. Although bonds are not guaranteed to retain value, they do tend to be steadier than stocks. You must adjust your stock/bond mix as the need for growth decreases, and the need for stability and income increases. As you near retirement, you can change your allocation from stocks to bonds.
Rule of Thumb
According to NOLO (nolo.com), the rule of thumb for retirement savings is that you should subtract your age from 100 and put that portion in stocks. For example, at age 30, you would put 100 minus 30 -- or 70 percent -- of your money in stocks. The remaining 30 percent goes into bonds. This allocation changes over the years. At age 40, you would put 60 percent in stocks and 40 percent in bonds, so that your risk goes down as you get older.
The New Rule of Thumb
CNN Money notes that with people living longer and therefore needing their retirement savings longer, some financial planners recommend a new rule of thumb: Subtract your age from 110 or 120, depending on how you estimate your longevity. For example, at age 30, you would subtract 30 from 110 to find that you should have 80 percent of your retirement funds in stocks and the rest in bonds. This more aggressive stock allocation can provide more growth for your portfolio so you have more money to draw from in retirement.
The rules of thumb for your investments may not apply to your particular situation. For example, if you started saving after age 40, you may feel you have some catching up to do. If so, you might consider keeping more money in stocks to provide more growth. If your strategy is successful, the growth in your portfolio can help make up for the lack of savings in your early years. You can adjust in the other direction if you feel you have more than enough retirement funds and don't want the growth.
Wells Fargo (wellsfargoadvantagefunds.com) points out that age should not be your only consideration when weighing stocks against bonds. Your tolerance for risk should guide you. For example, if you decide you want to be extremely aggressive, based on the fact that you like the potential for growth that stocks offer, you may consider placing most of your money in the stock market even after age 60. On the other hand, if you lie awake at night worrying about your stocks, you might consider a much lower stock allotment than the rules of thumb suggest.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.