@Bea - Great question, one we just about all wrestle with, and as footenote noted, a classic asset allocation question or dilemma. Hard to say what answer is right for you, that will very much depend on your own tolerance for risk, your willingness to do things to make it through potentially harder times (like going back to work, etc.). I'd say though that retiring in your 50s should make it a little easier since it's less life span to cover than retiring, say, in your 30s. I guess the two camps of thought go like this, with an infinite spectrum in-between:
1. I don't want any risk to my portfolio going down through market volatility, so I will keep it in mostly (or even all) in investments with little or no risk. I acknowledge that my portfolio will almost certainly become less valuable over time through inflation, and if inflation is bad enough, I might not have enough to meet my expenses in later years.
2. I think inflation could ravage my portfolio over time, and the only way to keep up or stay ahead of it is to have significant exposure in the stock market (i.e., to have a large percentage of your portfolio in stocks). I acknowledge that there could be some significant ups and downs along the way, and have to be able to stomach large drops and not get spooked out of the market when it does, under the belief that over time it will recover. But it's possible it may never recover.
One way financial advisors often recommend to find a balance is to determine what your most basic living expenses are, and identify some fixed income streams that are super safe to cover those. For example, Social Security or a purchased annuity indexed for inflation are some ways to ensure you'll always have at least enough for shelter, food, utilities, etc. Then for the more discretionary expenses, have an asset allocation that has a fair amount invested in the stock market to (hopefully) keep your portfolio growing. In this way, you can feel confident that you'll never go hungry or without a roof over your head, and won't have to worry about occasional, and inevitable, bad times in the stock market. In the long run, your assets invested in reasonable indexed stock funds and a healthy mix of bonds should do well and hopefully hit that 7% nominal return.
As an example, if you determine you need a minimum of $3000/month, or $36,000/year to meet your minimum living expenses, then find some safe income sources to cover those, like your expected Soc. Security payment, pensions, annuities, rental income, etc. If you'd like to have another $12,000/year for travel, discretionary purchases, etc., then keep 25 x $12,000 = $300,000 in a mix of stocks, bonds, etc. (probably mostly in indexed stocks).
- Let's say you will get $2000/month from Soc. Security. Now you need another safe source of income to cover the remaining amount needed of $1000/month
- From your assets, purchase an annuity from your assets that will provide income of $1000/month. Or perhaps purchase a rental home that will provide $1000/month in income after all expenses, management fees, vacancies are deducted.
- Whatever is left in your portfolio, invest in indexed stocks and bonds
Obviously prior to eligibility for Soc. Sec. you'll have to find a different income stream for the $2000/month.
Also, another great hedge against risks to depleting your portfolio over time or suffering large setbacks early in your retirement are to do things to reduce drawing down on it early, so you won't be in that situation where you need to go back to work in your 70s. For example, if you're satisfied with the idea of picking up a little part time work in your first few years of retirement while you're able-bodied, that will allow you to withdraw less than 4% for those first few years, and your portfolio should grow even larger, giving you more security for later years.