Balancing Risk and Reward: Rethinking Your 65-Year-Old Portfolio in 2025

As retirees confront the dual challenges of prolonged longevity and volatile markets, the question of how to allocate assets becomes critical. A reader recently asked: “I’m 65 with 82% of my portfolio in stocks. Should I shift some into bonds now?” The answer hinges on balancing growth needs with the imperative to preserve capital over what could be a 30-year retirement. Let’s dissect the data and strategy behind this decision.

The Case for Caution: Why 82% Stocks May Be Too Risky

The traditional “age-based” asset allocation framework—subtracting your age from 100 to determine stock exposure—would suggest a 35% stock allocation at 65. However, modern guidelines, informed by extended lifespans and inflation risks, have evolved. The 2025 recommendations for 65-year-olds now advocate a 60% stock, 35% bond, and 5% cash allocation, as detailed in recent analyses from institutions like T. Rowe Price and Schwab.

Your current 82% stock allocation exceeds even the aggressive end of these guidelines, leaving your portfolio overly exposed to market swings. Historically, equity markets have delivered strong returns, but they also carry significant volatility. A 20% drop in stocks—common during corrections—would erase $164,000 from an $800,000 portfolio. For retirees withdrawing 4% annually ($32,000), such a loss could force cuts or premature sales during a downturn.

The Rationale for Bonds and Cash

Bonds serve two vital functions: income generation and volatility dampening. High-quality bonds (e.g., U.S. Treasuries and investment-grade corporates) provide steady interest payments while shielding against stock market whiplash. The recommended 35% bond allocation includes a bond ladder—a mix of short- and intermediate-term maturities—to ensure liquidity and avoid locking funds into long-term instruments during rising rates.

Cash (5%) or ultra-short-term bonds should cover two to four years of living expenses, as advised by Schwab. This “buffer” prevents the need to sell stocks during a bear market. For example, in 2020’s March crash, investors with a 60/35/5 portfolio would have seen a 12% overall decline versus a 23% drop for an 82% stock-heavy portfolio.

Geographic and Sector Diversification Matters

Even within equities, the recommended allocations emphasize diversification:
- 60% of the stock portion in U.S. large-cap stocks (e.g., S&P 500) for stability.
- 25% in developed international stocks (e.g., European and Japanese equities) to capture global growth.
- 10% in U.S. small-caps (e.g., Russell 2000) and 5% in emerging markets for growth potential.

This structure avoids overconcentration in any single market. For instance, while the S&P 500 has returned 10% annually over the past decade, emerging markets have lagged—highlighting the need for disciplined rebalancing.

Tax and Regulatory Considerations

Tax efficiency is another pillar of retirement planning. Holding Roth IRAs/401(k)s alongside traditional accounts allows retirees to manage taxable income strategically. For example, Roth withdrawals are tax-free, whereas selling stocks in taxable accounts may incur capital gains taxes.

The SECURE 2.0 Act’s 2025 changes also permit catch-up contributions up to age 63, enabling last-minute adjustments to align with allocation goals.

The Gradual Shift: How to Rebalance

Shifting from 82% to 60% stocks need not be abrupt. A phased approach—such as trimming equities by 5% annually over four years—minimizes timing risks. For instance, selling 5% of equities (about $40,000 on an $800,000 portfolio) could be reallocated to bonds or cash, while maintaining exposure to growth sectors.

Conclusion: Why Prudence Pays Off

The math is clear: retirees who maintain excessive equity exposure risk outliving their savings. A 2023 study by the Center for Retirement Research found that portfolios with over 70% stocks faced a 30% higher probability of depletion over 30 years, even with moderate withdrawal rates. Conversely, the 60/35/5 structure has historically provided a smoother path—delivering 6-7% annualized returns with 10-12% volatility, compared to 8-9% returns with 15-18% volatility for an 82% stock portfolio.

In 2025, the priority is not just growth but sustainability. By rebalancing to the recommended allocation, you align with a strategy that has been stress-tested against inflation, longevity, and market cycles. As you navigate retirement, remember: the goal is not to beat the market, but to outlast it.

Data sources: T. Rowe Price, Schwab, Center for Retirement Research.