Despite the headlines that make it seem as if every baby boomer is going to struggle to pay the bills in retirement, there are some people who have done an excellent job saving for their post-full-employment years.  For those people, the challenge will be less about worrying whether they can afford to pay the bills and more about educating themselves so that they properly manage their investment portfolios.  Over the next few weeks, I will write a series of articles geared toward investors who have built moderate-to-large nest eggs and are looking for general ideas about how to allocate their investments.

From a financial standpoint, one of the most important things you can do in retirement is manage your cash flows appropriately.  In general, the process of managing cash flows starts with the following calculations:

Calculate the annual amount of money you need to live.

Subtract Social Security, pensions, part-time jobs, rental income, and other non-financial-markets-related income from the amount of money you need to live.

The remaining amount is the amount that needs to be funded by income generated from your investments.

At this point, asset allocation comes into play.  We all have different risk tolerances.  But I am willing to bet a majority of investors will sleep better at night moving down the risk curve as they enter their retirement years.  In this article, I would like to offer one generally more conservative asset-allocation model.  Naturally, there are countless variations investors could create, and your investment objectives, risk tolerance, and time horizon will help shape your allocation.  Next week, I will explore two additional asset allocations that take on more risk and generate more income than the one below.

Asset Allocation

Today isn’t exactly an ideal investing environment for putting together an income-producing portfolio.  Bond yields are still at historically low levels and stocks are generally not cheap.  Nevertheless, thousands of people are reaching the traditional retirement age each day.  Those people will have to play the hands they are dealt.  With that in mind, what follows is an example of an asset-allocation model conservative investors with $1 million in retirement savings could consider.

Generally More Conservative Asset-Allocation Model

Investment Grade Bonds and CDs 50% of portfolio ($500,000)

50% of the portfolio ($500,000) laddered into individual investment grade corporate bonds and certificates of deposit with less than 10 years to maturity.

Position sizes would range from $10,000 to $20,000, depending on your view of the company.  This would allow for adequate diversification.

Given that I think the federal funds rate will not be raised for at least two more years and possibly longer, I think the bond-and-CD ladder should begin at three years.

As a result of the challenging yield environment, and in an effort to generate more income for the portfolio, I would structure the ladder something like this: