Asset Allocation by Age: How to Adjust Your Portfolio Risk Over Time

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Asset allocation, the split between stocks, bonds, and cash in your portfolio, is one of the biggest drivers of both how much your investments grow and how much they swing during a bad year.

Age-based rules of thumb have existed for decades to help investors figure out a reasonable starting point, but the classic formulas have shifted meaningfully as life expectancy has increased and the investing landscape has changed.

This guide walks through the modern age-based rules, how they translate into real Canadian ETF portfolios, and the factors that matter more than your birthday when deciding how much risk to actually carry.

The Classic Rule Has Been Updated

The original rule of thumb was simple: subtract your age from 100, and that’s the percentage of your portfolio to hold in stocks, with the rest in bonds and cash. A 30-year-old would hold 70% stocks, a 60-year-old would hold 40%.

This rule was built for an era when pensions were more common and retirements were shorter. With Canadians increasingly funding 25- to 30-year retirements largely through their own savings, many advisors and target-date fund providers now use a higher starting point, subtracting your age from 110 or even 120 instead, which keeps more of the portfolio in growth assets for longer.

What This Looks Like With Canadian ETFs

Canada’s major ETF providers offer single-fund, all-in-one portfolios built around fixed equity-to-bond ratios, which makes implementing any of the targets above straightforward without needing to buy and rebalance individual funds yourself.

Each of these funds rebalances internally, meaning the provider buys and sells the underlying holdings to maintain the target mix, so you don’t need to manually trade to stay on target. What these funds don’t do automatically is move you between categories as you age.

XEQT stays 100% equity indefinitely; shifting from XEQT to XGRO to XBAL as you get closer to retirement is a decision you make yourself, typically by directing new contributions into the more conservative fund rather than selling your existing holdings outright, which can trigger capital gains tax in a non-registered account.

In your 20s and 30s: with several decades until retirement, most guidance leans toward the highest end of the equity spectrum, commonly 90% to 100% stocks. The core argument is that time in the market lets you ride out downturns, and stocks have historically delivered the strongest long-run returns of any major asset class over periods this long.

A 100% equity fund like XEQT or VEQT can fall 30% to 40% in a severe downturn, so this only works if you’re genuinely confident you won’t panic-sell during a crash.

In your 40s: many investors begin introducing a modest bond allocation, commonly landing in the 70% to 85% stocks range. This isn’t necessarily because retirement is imminent, but because a portfolio large enough to matter emotionally benefits from slightly less volatility, and a small bond allocation takes the edge off a downturn without sacrificing much long-term growth.

In your 50s: with retirement potentially 10 to 15 years away, a more balanced mix, often in the 55% to 70% stocks range, becomes more common. This is also typically when sequence of returns risk starts entering the conversation, since a significant market decline in the years immediately before retirement leaves less time to recover before you’d need to start drawing down the portfolio.

In your 60s and into retirement: allocations commonly settle into the 40% to 55% stocks range, though this varies enormously based on other income sources. A retiree with a solid workplace pension and full CPP and OAS may comfortably hold more in equities than a retiree relying almost entirely on their own portfolio for income, since guaranteed income sources reduce the portfolio’s job of funding every dollar of retirement spending.

Why Age Alone Isn’t the Full Picture

A few factors matter as much as, or more than, age when setting your actual allocation:

• Risk tolerance. If a 30% to 40% drop in your portfolio’s value would genuinely cause you to sell everything in a panic, you’re not well-suited to a 100% equity allocation, regardless of how young you are or what the formula suggests. The honest test is whether you can hold through a severe downturn without selling, not whether you theoretically should be able to.
• Other guaranteed income. A defined benefit pension, a rental property generating steady income, or a spouse’s separate retirement savings all reduce how much your own investment portfolio needs to carry the full weight of your retirement income, which can support a more aggressive allocation than age alone would suggest.
• Time horizon for the specific money. Retirement savings and a house down payment fund due in 3 years shouldn’t follow the same allocation just because you’re the same age for both. Shorter time horizons generally call for more conservative allocations, independent of your age.
• Sequence of returns risk near retirement. The 5 to 10 years before and after you stop working are widely considered the highest-risk window for portfolio withdrawals, since a market decline during this period, combined with income withdrawals, can permanently impair a portfolio in a way the same decline earlier or later in life wouldn’t. This is the main reason many investors deliberately shift toward bonds in the decade before retirement rather than waiting until their official retirement date.

Where You Hold Each Asset Matters Too

Beyond the stock-to-bond split itself, which account you hold each asset type in can affect your after-tax returns. In Canada, a few general patterns are worth knowing:

• US dividend-paying holdings are generally more tax-efficient inside an RRSP, since the Canada-US tax treaty waives the standard 15% US withholding tax on dividends specifically for RRSPs, an exemption that doesn’t apply inside a TFSA.
• Broad market growth-focused holdings are commonly placed in a TFSA, since all growth and withdrawals from a TFSA are entirely tax-free.
• Bond ETFs, which generate interest income taxed at your full marginal rate, are often better placed inside an RRSP or TFSA rather than a non-registered account, where that interest would otherwise be taxed annually.

If you’re using a single all-in-one ETF like XEQT or VBAL, this asset-placement optimization isn’t really available to you, since the fund holds everything together as one package. It becomes more relevant if you’re building a portfolio from individual ETFs across multiple account types.

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FAQs

What’s the right stock-to-bond ratio for my age?

There’s no single correct answer, but a common modern starting point is 110 minus your age in stocks, with the remainder in bonds. A 40-year-old following this rule would target roughly 70% stocks and 30% bonds, adjusted up or down based on personal risk tolerance and other income sources.

Should I use 100, 110, or 120 minus my age?

This depends on your risk tolerance and time horizon. The 100-minus-age version is the most conservative of the three, 120-minus-age is the most aggressive, and 110-minus-age sits in between as a commonly cited balanced default. Choose the version you could realistically hold through a severe market downturn without selling.

Do I need to manually rebalance an all-in-one ETF like XEQT or VBAL?

No. All-in-one ETFs rebalance internally, meaning the fund provider maintains the target equity-to-bond ratio for you. What they don’t do automatically is move you between funds, for example from XEQT to XGRO as you approach retirement; that transition remains a decision you make yourself.

When should I start shifting from stocks to bonds before retirement?

Many investors begin this shift 5 to 10 years before their expected retirement date, gradually increasing their bond allocation to reduce sequence of returns risk, the danger of a market downturn hitting right as withdrawals begin. The exact timeline depends on your other income sources and how much of your retirement spending your portfolio needs to cover.

Is 100% stocks ever appropriate?

Yes, commonly for investors with a genuinely long time horizon (10 or more years) and a demonstrated ability to hold through downturns without selling. All-in-one equity funds like XEQT or VEQT can fall 30% to 40% in a severe bear market, so this allocation only makes sense if that kind of decline wouldn’t push you to abandon your plan.

Does having a workplace pension change my asset allocation?

It can. A retiree or pre-retiree with a solid defined benefit pension, or other significant guaranteed income, may reasonably hold more in equities than someone relying entirely on their own investment portfolio for retirement income, since the pension reduces the portfolio’s role in funding essential expenses.

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