Retirement: Why the 60/40 portfolio may not be the way to go

When it comes to retirement planning, the traditional portfolio of 60% invested in stocks and 40% invested in bonds may not be the way to go, according to GenWealth Financial Advisors' Scott Inman. Inman explains that when it comes to retirement, "it's not about the economy, it's about your economy." He advises his clients to develop a withdrawal strategy and diverse portfolio to help them remain nimble in retirement.

Video transcript

DIANE KING HALL: Investors are keeping an eye on next week's Fed meeting. The big question, will it pause or hike rates? But how does this impact your retirement savings? We're joined now by GenWealth financial advisor and host of "Get Ready for the Future Show", Scott Inman to discuss more. So let's start with that. The Fed expectations next week-- next week, we don't know whether it's going to pause, skip, or hike. Does it matter in terms of one's retirement?

SCOTT INMAN: Yeah, well first of all, thanks for having me. I think it matters in the short-term, but it doesn't matter in a long-term plan for retirement. I would say this, when we tell our clients this all the time, your decision on whether to retire or whether or not you have reached true financial independence should not depend solely on your account balance and should not depend on what the stock market does over a short period of time and should not depend on what the latest Fed decision is when it comes to raising interest rates.

When it comes to retirement, the outcome is income. Now, certainly account balances play a big part of that. But your investment strategy is really built in retirement to provide you a stream of income for your basic lifestyle. So you can pay for those eggs and all of those things you talked about and those grocery prices and give yourself a raise in income over time because we know inflation, even if it does cool is going to be hanging around throughout your retirement.

DIANE KING HALL: So Scott, I got to ask. We've seen data where people are having to push back their expected retirement age, whether we're talking about baby boomers or older Gen X, what is your advice on when you pull the trigger on when you should be retiring? What should your financial picture look like?

SCOTT INMAN: Well, I think it is a combination of income and assets. So unless you have put together a plan on very specifically and dynamically how much monthly income you're going to be able to receive over the course of time from your assets, when layered on top of Social Security, maybe there's a pension, what other guaranteed income sources you have, that's when you have a clearer picture of whether you can retire tonight.

So it's not an age, and it's not an asset number. It is an income solution. And that comes from for us here at GenWealth, creating a retirement income plan written on paper on purpose so that you can see what your income will be. And that allows you to make an informed decision of maybe I need to continue to contribute and grow that asset level for a couple of more years. Or maybe I'm ready to go right now. You won't know unless you plan.

DIANE KING HALL: Is the 60/40 portfolio still the way to go?

SCOTT INMAN: Not for us. You know, this 2022 was a real good reminder that the 60/40 portfolio can have a really rough go at it. It was one of the worst years on record for a quote, unquote balanced portfolio. So we believe a simple withdrawal strategy, which really doesn't designate what you sell and when you sell it.

That's what we're trying to do here. You know, we tell our clients all the time, it's not about the economy, it's about your economy. And that really just means control what you can control, right? And what we can control when it comes to investment is the strategy and the withdrawal strategy, meaning let's sell from the less volatile, more conservative end of the investment strategy.

Right now that might be cash and CDs, right, because we're getting pretty favorable interest rates on a short-term CD. We may be able to ladder that and get the income for today in the next year from that because we know that it's not going to be volatile. And we're able to push the volatility down the road, the equity part of your portfolio.

And we do believe you need to still believe in equities because you have to have that growth component even in retirement. It's not a stop sign when it comes to investment strategy. It's just simply a yield sign. But those equities, those stocks have to be positioned for long-term. We're not intending to sell anything in a down market. We're pushing that down the road to allow time to heal all wounds, if you will.

So 60-40 that's two asset classes. And there are more than that. We believe you've got to take a look at alternatives, cash, other instruments to build a more dynamic investment portfolio.

DIANE KING HALL: That's a great perspective because just to give a personal anecdote. I remember my grandmother when she was getting towards the end of her life, there was a lot of concern about would her life outlast her money because she was so heavily invested on in bonds.

And I think there is skittishness with older people when they're in retirement about just the safety of, you know, what's to some people a risky security stocks. But, you know, you make a good point. It's really that barbell approach when you come to your investments.

But let's talk about younger generations. They always say it's never too soon to start. I saw some recent data that surprised me in a good way about Gen Z and responsible financial habits. Now, that data was looking at their credit usage. And they weren't using it as much as I expected, using more on debit cards and cash and just 17% relying on credit cards. But what do they need to be doing to preparing for retirement, especially because they're very early in their earning years for the ones who are adults?

SCOTT INMAN: Yeah, it's really hard to have that long-term perspective when you're just trying to pay the bills, you're just trying to raise some kids, right? You're not looking that far down the road. But the reality is getting started early. And the data shows this, makes more of a difference than putting in more late, right, because of the time value, the compound growth that happens over a very long period of time.

And it can be a very small amount. I would recommend sitting down for younger people with an advisor and figuring out a budget because that's the only way you're going to determine if you have some money to save, right? You've got to be able to spend less than you make. Create some margin create some positive cash flow.

And then even if you can throw $100 or $200 a month at a Roth IRA, for instance, and do that over a long period of time, and eventually max that out. It's going to be very, very good for you over a long period of time.

And then, of course, I would say too, if they have an employer you've got to get into that 401(k) and get the employer match because you're leaving money on the table if you don't at least contribute enough to your employer plan to get the money they're going to match.

DIANE KING HALL: That's righ. I mean, maximize that match. Couldn't agree more. All right. Thank you so much, GenWealth financial advisor and host of "Get Ready for the Future Show", Scott Inman. Great advice. Thank you so much.

SCOTT INMAN: Thank you.