A client, age 65, is retired and relies on their investment portfolio for current income. They have a moderate risk tolerance and are seeking to generate consistent income with some potential for modest capital appreciation. Which of the following asset allocations would be MOST suitable for this client?
- A50% equities, 50% fixed income
- B70% equities, 30% fixed income
- C30% equities, 70% fixed income
- D100% money market funds
Show answer & explanationAnswer & explanation
Correct answer: C. 30% equities, 70% fixed income
A client who is retired, relies on their portfolio for income, and has a moderate risk tolerance would generally benefit from a higher allocation to fixed income (bonds) for stability and income generation, along with a smaller allocation to equities for modest appreciation potential. 30% equities and 70% fixed income provides a relatively conservative approach that prioritizes income and capital preservation.
Why the other options are wrong
- A. While balanced, a 50/50 split might still be too volatile for a client prioritizing income and capital preservation in retirement.
- B. This allocation is too aggressive for a retired client relying on income with moderate risk tolerance.
- D. Money market funds offer high liquidity and stability but very low returns, which would likely not meet the client's need for 'some potential for modest capital appreciation' or sufficient income generation over time.
Income-Oriented Asset Allocation
An investment strategy focused on generating regular income, typically by allocating a larger portion of the portfolio to fixed-income securities, while potentially including a smaller portion in equities for modest growth.
- Prioritizes current income and capital preservation.
- Higher allocation to bonds, lower to stocks.
- Suitable for retirees or those with short-to-medium term income needs.
- Aims to reduce volatility compared to growth-oriented portfolios.
Memory trick: Income needs, bonds lead; growth desires, stocks inspire.