The Future of the 60/40 Allocation

The 60/40 portfolio, with 60% in equities and 40% in fixed-income securities, has long been favored for balancing growth and stability. This report— the second in a two-report series—assesses the 60/40 strategy’s ability to sustain retirees through their post-working years, focusing on Australia and the United States.

The Future of the 60/40 Allocation: Modelling the Performance of the 60/40 Portfolio in Retirement uses Monte Carlo simulations to evaluate the impact of factors such as initial retirement savings, desired lifestyle, gender disparities, and market volatility on the sustainability of retirement funds.

Authored by a research team from Monash University, the report reveals significant differences in how long retirement savings last for men and women, highlighting the need for financial planning that addresses gender-related gaps. It also shows that poor market returns early in retirement can greatly reduce savings, making careful withdrawal planning and portfolio management essential. This study calls for a shift toward more nuanced retirement planning, with an emphasis on personalized retirement strategies that adapt to individual needs and changing market conditions.

Our first report in the series, The Performance of the 60/40 Portfolio, examines the historical performance of the 60/40 equity/bond portfolio—highlighting its benefits, challenges from variable stock–bond correlations, generational differences, market-specific risks, and the role of alternative assets.

Retirement Systems in Australia and the United States

This study evaluates the practical efficacy of the 60/40 investment strategy in both countries, scrutinizing its viability amidst fluctuating market conditions and diverse retirement income policies.

In Australia, the Superannuation Guarantee (super) is the core retirement savings system. Employers must contribute a portion of an employee’s salary into a super fund, and individuals can add more if they choose. These funds are invested in various assets to grow over time. Withdrawal eligibility depends on age, birth year, and work status. In addition to superannuation drawdowns, retirees may be eligible to receive government payments in the form of the Age Pension.

In the United States, retirement savings come from various plans. The 401(k) is a common employer-sponsored plan where both employers and employees contribute, with investment choices made by the employee. Traditional and Roth IRAs offer additional savings options, particularly for self-employed individuals. Withdrawals from these accounts must begin at age 72 or 73, depending on the birth year. Retirees also receive Social Security benefits, which they can claim at or before full retirement age.

Recommendations for Retirement Planning

Our report highlights the need for flexible, personalized retirement planning, focusing on the following key areas:

• Personalized and dynamic retirement planning: Retirees should tailor their strategies based on their savings, lifestyle goals, and gender-related financial gaps while regularly reviewing and adjusting their portfolios.
• Flexible withdrawal strategies and proactive risk management: Withdrawal methods should adapt to market conditions and individual financial needs while mitigating risks from poor early returns through strategic portfolio management.
• Comprehensive planning and enhanced financial literacy: Retirement planning should integrate government benefits, tax considerations, and additional financial resources, while also improving financial literacy to help retirees manage their income effectively.

While the 60/40 portfolio remains a useful starting point, its effectiveness varies based on personal circumstances and market dynamics. A one-size-fits-all approach is insufficient—retirees should engage in proactive, customized financial planning. Given the evolving nature of financial markets and retirement policies, continuous adaptation and research are necessary to ensure long-term financial stability for retirees.

Key Takeaways

• The 60/40 portfolio does not guarantee retirement security for all retirees; its success depends on initial savings, lifestyle goals, and market conditions.
• Higher starting balances improve the portfolio’s ability to sustain retirees, while those aiming for a comfortable lifestyle without sufficient savings risk depleting their funds too soon.
• Gender disparities in retirement outcomes highlight the need for financial planning strategies that address differences in income, life expectancy, and savings accumulation.
• The risk of experiencing negative market returns early in retirement can significantly shorten the longevity of savings, emphasizing the importance of sequence-of-returns risk management.
• Retirees should adopt flexible withdrawal strategies, regularly review their portfolios, and integrate other income sources and financial planning tools to enhance retirement security.
• A dynamic and personalized approach to retirement planning is essential, as financial markets and individual needs continue to evolve.