How to Build a Retirement Portfolio — Asset Allocation, Account Strategy, and Rebalancing for Every Age

Academic research consistently shows that asset allocation — the split between stocks, bonds, and other asset classes — explains approximately 90% of the variation in portfolio returns over time. Individual stock picks and market timing matter far less than this foundational decision. The classic framework is simple: hold your age in bonds and the rest in stocks. A 30-year-old would hold 30% bonds and 70% stocks; a 60-year-old would hold 60% bonds and 40% stocks.

In practice, many financial planners now recommend a more aggressive variant: subtract your age from 110 or 120 rather than 100, reflecting longer life expectancies and the need for growth to outpace inflation over a potentially 30-plus-year retirement. Under this model, a 30-year-old might hold 80–90% in equities, while a 60-year-old would hold 50–60%. With the S&P 500 delivering average annual returns of roughly 10% over the past century compared to bonds at approximately 5%, the equity premium compounds enormously over decades.

The key is to match your allocation to your actual risk tolerance, not just your age. If a 20% market drop would cause you to panic-sell, you need more bonds regardless of what the formula says. Behavioral risk — the likelihood that you abandon your plan during a downturn — is the single greatest threat to retirement portfolio returns.

The simplest and most effective retirement portfolio uses broad-market index funds as its foundation. The Vanguard Total Stock Market Index Fund (VTI), currently trading at $338.77 with a P/E of 26.8, provides exposure to over 4,000 U.S. stocks across all market capitalizations for an expense ratio of just 0.03%. For bond exposure, the Vanguard Total Bond Market Index Fund (BND) at $75.17 covers the entire U.S. investment-grade bond market — government, corporate, and mortgage-backed securities — for a similarly minimal fee.

A well-diversified retirement portfolio typically includes four components. First, U.S. equities via a total market fund like VTI, which captures large, mid, and small-cap stocks in proportion to their market weights. Second, international equities through a fund like VXUS (Vanguard Total International Stock), which provides exposure to developed and emerging markets and reduces country-specific risk. Third, U.S. bonds through a total bond fund like BND, which provides income and stability. Fourth, Treasury Inflation-Protected Securities (TIPS) or I Bonds, which protect against inflation eroding your purchasing power — particularly important given that the CPI index reached 326.6 in January 2026.

For investors who want even more simplicity, target-date funds package all of these components into a single fund that automatically adjusts the allocation as you age. Vanguard's Target Retirement 2055 Fund, for example, currently holds roughly 90% stocks and 10% bonds and will gradually shift toward bonds as 2055 approaches. The trade-off is slightly higher expense ratios and less control over the exact allocation — but for many investors, the discipline of automatic rebalancing more than compensates.

Retirement savers with access to a 401(k), a traditional IRA, and a Roth IRA have a powerful tax optimization opportunity that many overlook. The principle is straightforward: hold tax-inefficient investments in tax-advantaged accounts and tax-efficient investments in taxable accounts.

Bonds and bond funds generate interest income taxed as ordinary income — at rates up to 37% for high earners in 2026. These belong in your 401(k) or traditional IRA, where that income grows tax-deferred. REITs, which must distribute 90% of taxable income as dividends, are similarly tax-inefficient and should be sheltered in tax-deferred accounts. Conversely, broad-market stock index funds like VTI are remarkably tax-efficient — they generate minimal capital gains distributions and qualified dividends are taxed at preferential rates of 0%, 15%, or 20%. These can sit comfortably in a taxable brokerage account.

Roth accounts deserve special strategic treatment. Because Roth withdrawals are completely tax-free in retirement, you want to maximize the growth in these accounts. That means holding your most aggressive, highest-expected-return investments — typically stock funds — in your Roth IRA. A $100,000 investment in stocks that grows to $500,000 over 25 years generates $400,000 in completely tax-free gains in a Roth, compared to $400,000 in taxable gains in a traditional IRA that will be taxed as ordinary income upon withdrawal.

For 2026, the annual 401(k) contribution limit is $23,500 ($31,000 with catch-up contributions for those 50 and older), and the IRA limit is $7,000 ($8,000 for those 50-plus). Maximizing all available tax-advantaged space before investing in taxable accounts should be the default strategy for most retirement savers — the tax benefits compound just as powerfully as investment returns.

The most widely recommended DIY retirement portfolio is the three-fund portfolio, popularized by Vanguard founder Jack Bogle and championed by the Bogleheads investing community. It consists of just three holdings: a U.S. total stock market fund (VTI), an international stock fund (VXUS), and a U.S. total bond fund (BND). Despite its simplicity, this portfolio provides exposure to over 15,000 stocks and thousands of bonds across the globe.

A common allocation for a 35-year-old following this approach might be 50% U.S. stocks, 30% international stocks, and 20% bonds. The international allocation is often debated — some advisors recommend matching the global market weight of roughly 40% international, while others argue that U.S. multinational companies already provide substantial global exposure. A reasonable middle ground is 25–35% of your equity allocation in international stocks.

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Variations on this core portfolio can address specific needs. Adding a small allocation (5–10%) to REITs provides real estate exposure and additional income. Including TIPS protects against inflation surprises. For those approaching retirement, adding a short-term bond fund or money market allocation creates a cash buffer for the first few years of withdrawals, preventing the need to sell stocks during a downturn — a strategy known as the bucket approach.

Once you have built your portfolio, the most important ongoing task is rebalancing — periodically selling assets that have grown beyond their target weight and buying those that have fallen below it. Without rebalancing, a portfolio that starts at 80% stocks and 20% bonds can drift to 95% stocks and 5% bonds after a strong bull market, exposing the investor to far more risk than they intended.

There are two common rebalancing approaches. Calendar rebalancing involves checking and adjusting your allocation at fixed intervals — annually or semi-annually. Threshold rebalancing triggers a rebalance only when an asset class drifts beyond a set tolerance, typically 5 percentage points from target. Research suggests both approaches produce similar long-term results; the important thing is picking one and sticking with it.

The most tax-efficient way to rebalance is through new contributions. If your stock allocation has grown too large, direct new 401(k) and IRA contributions entirely to bonds until the balance is restored. This avoids selling appreciated assets and triggering taxable gains. In tax-advantaged accounts, you can rebalance freely without tax consequences — another reason to hold your most volatile assets in 401(k)s and IRAs where trades do not generate tax events.

As you approach retirement — typically within 5 to 10 years of your planned exit — begin gradually shifting your allocation toward your retirement target. A common retirement allocation is 40–50% stocks and 50–60% bonds, though this depends heavily on the size of your portfolio relative to your spending needs, whether you have other income sources like Social Security or a pension, and your personal risk tolerance. The transition should be gradual — moving 2–3 percentage points per year toward bonds rather than making a sudden shift that could lock in losses during a downturn.