Bond/Equity Mix During Retirement

[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.

[ltsddd]

I believe that sounds about right. Historically, the S&P 500, never had a negative return over any rolling 10-year period. It’s not really a 10 year downturn, but if there’s a downturn, you might need the next several years to recoup the losses.

I was looking into this a few years ago read up on the galeno strategy, bucket of $$, etc.. One of the best books I got from a clearance bin is Ben Stein and Phil DeMuth’s book titled Yes, You Can Still Retire Comfortably! In this book the authors ran and compared the outcome of a few scenarios of the various investment strategy. Highly recommended.

[svelte]

Thank you ltsdd.

I just ordered the book – it is dirt cheap even on Amazon. 5 bucks hard cover new shipping included.

Just found and read Galeno’s Mechanical Retirement Strategy and it is actually more in line with what I was thinking than other strategies I’ve been reading. Thanks for mentioning it.

[scaredyclassic]

40/60 sounds aggressive to me at age 30.

ignore me.

i see the stock mkt as sane people view cryptocurrency. a giant lie.

[henrysd]

[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.

[moneymaker]

I believe the required 4% withdrawal doesn’t start until age 70 1/2, please correct me if I’m wrong. Taking out 4% a year would never get you to zero, but by age 100 you would only have 30% left assuming gains=inflation.

[svelte]

[quote=moneymaker]I believe the required 4% withdrawal doesn’t start until age 70 1/2, please correct me if I’m wrong. [/quote]

It is my understanding you are correct.

[quote=moneymaker]
Taking out 4% a year would never get you to zero, but by age 100 you would only have 30% left assuming gains=inflation.[/quote]

What ratio of bonds/equities are you factoring in here?

Even considering a 50/50 mix, since the S&P 500 averages a 9% return a year, if you have 50% of your portfolio in stocks you should return 4.5% just on stocks, which beats the 4% withdrawal, so you should have 100% of your principle remaining…less inflation.

When you say 30% left, I take it you think inflation will take you from 100% to 30%?

[scaredyclassic]

what if the future is nothing like the past?

[henrysd]

The old school crap all the financial planners use is percentage of the bond in your portfolio is your age. If you are 60 years old , then 60% your portfolio is bond, 40% stock; if you are 70 years, then 70% bond allocation.

Modern days people don’t do that any more. There are several reasons:
1) Bond yield at 2% are still historically very low. We no longer have The old days bond can return 7% a year and provide good safety income return for retirement income. People used to just own GNMA bond fund for 7% safe return, but no longer attractive now.
2) People who already meet their basic retirement need can go more aggressive in investment. Many piggs who own rental homes fall into this category.

I would personally prefer age – 20 as my bond allocation during retirement. I can allocate 45% in bond when I turn 65.

[plm]

I don’t understand why there should be a percentage mix between stocks and bonds. Stocks have performed much better than bonds historically so the best strategy is to have the maximum amount of stock you can tolerate. At retirement, I would think it would be best to have five years worth of withdrawals in bonds and the rest in stocks. This way you should be able to weather any downturn in stocks that last up to five years.

And until you plan on withdrawing money, it should be 100 percent stocks to maximize your gains until retirement.

[svelte]

[quote=scaredyclassic]what if the future is nothing like the past?[/quote]

This worries me quite a bit, but really all we have to go on is how things behaved in the past.

I’ve been looking at this chart a lot:

http://www.macrotrends.net/2324/sp-500-historical-chart-data

ltsdd talked about the period of time it takes for the market to recover lost ground – I would call this a “bathtub” period…things go down (to the bottom of the bathtub) then recover.

If you look at the microtrends data in the last 50+ years, there were the following bathtubs and pure growth (not in a bathtub) periods:

Bathtub: 12/1961 – 1/1964 (2 yrs 1 mo)
Pure Growth: 1/1964 – 1/1966 (2 yrs)

Bathtub: 1/1966 – 8/1967 (1 yr 8 mo)
Pure G: 8/1967 – 1/1969 (1 yr 4 mo)

Bathtub: 1/1969 – 4/1971 (2 yr 3 mo)
Pure G: 4/1971 – 12/1972 (1 yr 8 mo)

Bathtub: 12/1972 – 6/1980 (7 yr 7 mo)
Pure G: 6/1980 – 11/1980 (5 mo)

Bathtub: 11/1980 – 1/1983 (2 yr 2 mo)
Pure G: 1/1983 – 11/1983 (11 mo)

Bathtub: 11/1983 – 8/1984 (10 mo)
Pure G: 8/1984 – 9/1987 (3 yr 10 mo) (hit Black Friday)

Bathtub: 9/1987 – 5/1989 (1 yr 8 mo)
Pure G: 5/1989 – 8/2000 (11 yr 3 mo) (hit tech bubble)

Bathtub: 8/2000 – 10/2007 (7 yr 2 mo)
Pure G: 10/2007 – 10/2007 (1 mo) (hit housing bubble)

Bathtub: 10/2007 – 4/2013 (5 yr 5 mo)
Pure G: 4/2013 – present (4 yr 9 mo and growing)

So technically ltsdd is right – no bathtub over 10 years. BUT the last two bathtubs had only 1 month in between so they felt like one big 12 year bathtub!

That is why this has been a no joy recovery.

Another thing that appears to be happening: since they instituted the circuit breakers (after 1987) to keep the market from tanking from panic, the cycles appear to have lengthened by a considerable amount. Not sure if I have the cause and effect right, but it sure appears that way.

[scaredyclassic]

things grow, and then they die.

our economy is different?

japans stock markets been basically flat for 30 years. is that not possible here?

[ltsddd]

[quote=svelte][quote=scaredyclassic]what if the future is nothing like the past?[/quote]

This worries me quite a bit, but really all we have to go on is how things behaved in the past.[/quote]

Things change. Stocks go up and down over time, but for the long-term it’s better behaved than we fear. If the S&P 500 return for the last 30 years is, say on average 8% per year; then I would expect the results will not be that much different for the next 30 years. Could be foolish thinking, but I am quite comfortable with that assumption as part of my planning.

[scaredyclassic]

the crazy mans portfolio…

10% gold
10% litecoin
3% tittiecoin
17% comic books.
4% russell 2000
1% pennies with copper
7% bonds
25% oil
22% s&p 500.
1% guns and ammo

[carlsbadworker]

[quote=scaredyclassic]what if the future is nothing like the past?[/quote]

Actually, as long as the future deviates from American’s past, we are toasted. The belief that “buy and hold” is a sound strategy has strong survivor-ship bias, since they focus on successful America and Europe returns. Back in 1900, an investor might have believed Russia and China to be good long-term bets, only to see his savings completely wiped out by revolution. And in almost any other countries, you often see stock market takes more than 10 years to recover from its peak bubble price (which is arguably where we are right now), and often it could take 30-70 years.

However, which asset class is risky free? You have to put money somewhere. Diversification would certainly help.

[Author]

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