[quote=svelte]Starting to lay plans for my distant retirement so I’ve been doing a lot of reading.
I’ve noticed most advisors recommend somewhere between a 40/60 to 60/40 mix bond/equity after one retires.
The bond portion, from what I’ve read, is to give a retiree a stable base in case the equities fall sharply during a downturn.
The equities portion is to allow a retiree to keep pace with inflation, in case s/he lives 20-30 or more years.
OK, makes sense so far.
Here is what confuses me: for the 401K portion of my retirement, the govt has a required minimum withdrawal (RMD) somewhere in the 4% range, dependent on the outcome of running an equation.
If I plan on only withdrawing the minimum each year, that means a 40% bond mix would get me through roughly a 10 year downturn.
That sounds excessive….am I looking at it right?
If not, what is the thinking of keeping 40-60% of one’s portfolio in bonds?
Confused.[/quote]
You are fine with 40% bond and 60% stock. Bond interest rate is low now and price is high, so you won’t get much return from bond other than the diversification effect. Stock still can return 6-6.5% long term. Nominal GDP growth is about 4.5%. The reported GDP growth we see on news headline is inflation adjusted rate, let us assume 2.5% real GDP growth and 2% inflation, so it come up with 4.5% nominal growth. The broad market S&P 500 also has 1.85% dividend yield (beating the T-bill now). So assuming P/E ratio stays the same in ideal world, the market will return 6.3% long term. Of course in real life P/E may expand or compress, the stock market return on the long haul will deviate from that, 6.3% can be a good guidance number to use.
