I was speaking with a colleague today and we were talking investment strategies for retirement (we are both in our late 50s). Over the past ~10 years, he has shifted from a 50/50 stocks/bonds allocation to something like 20/80 (he wasn't clear if he was in time horizon funds or not). Our difference of opinion was at the moment of retirement, he felt someone should be fully "safe" (i.e., 100% in Fixed Income), but I argued you have another 20+ years of life ahead of you – and you need some continued growth. I was not suggesting 100% in NVDA, but the risk of not keeping up with inflation outweighs the risk of a 30% drop in the market (and a potential multi-year recovery period). Thoughts?
Shifting investment allocation percentages as you age.
byu/TheImpPaysHisDebts ininvesting
Posted by TheImpPaysHisDebts
19 Comments
Anything outside 10years, S&P index.
Inside 10 years it depends on how rich/poor you are and your total plans for your money/needs.
Based on what we know, any properly fully funded 401K, is better of raw S&P fund.
Now, let’s say you put 2% in your 401k and started at 40 and have a pittance. You might want to hold onto those pennies. Because you can map things out and can’t afford a dip.
There is a thing called sequence of returns risk, whereby if at the time you retire there is a big and sustained drop in the stock market, and you can’t recover as you’re withdrawing money while the market is tanking. So there is good reason to adjust your asset allocation to having more in fixed income and less in stocks…But, you still need some stocks for growth, so a 100% allocation to bonds is crazy extreme. Have a sensible all purpose asset allocation and you survive.
I’m 100% equities at 41 and I have been since I started investing.
I will start buying bonds and shifting allocation of existing equities to bonds when I get to 15 years ~ out from retirement. By the time I’m retired I’ll be 60% bonds.
If he has enough and doesn’t want to take risk, that’s fine for him.
As a general rule, it makes sense to keep some equity. After all, people live 25+ years in retirement now.
At the time of retirement, you should be somewhere between 80/20 and 60/40 stocks to bonds/cash. This provides a balance between growth and mitigating sequence of returns risk. Stated another way, you should have one to three years expenses in cash equivalents and three to five years of bonds. This allocation will allow you get though almost all bear markets, without having to sell stocks while they are down. 20/80 stocks to bonds will not provide the growth necessary to get you through a 30 year retirement. There is a great chart prepared by Big ERN that demonstrated this. I don’t have the link, but I am sure someone will be able to provide it.
Edit: Here is the link [https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/](https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/)
I don’t understand why people focus on the risk of stock market volatility but ignore the very real risk of inflation
Missing information, like size of portfolio and annual spend amount. Fixed income is where you want to draw $ from to cover annual spending when the market is down. To feel safe, how many years of annual spending do you want covered from your fixed income ? Or, how many years do you think the market be down before it recovers ?
Depends on how much you need the funds. If you have other sources of income then it may be beneficial to only take RMDs and keep investments aggressive, but if you need the funds, more conservative makes more sense
One size very much does not fit all
I agree with you. I’m 70 and have never owned any bonds directly and the money I put in money market funds is just based on what I might need/want if we had a 2 year stock market correction and I didn’t want to sell any stocks.
My house is paid for and I have a small amount coming in with Social Security and the rest is QQQ and Bitcoin.
It also depends on how much you have and what your expenses are. My expenses are low. I’m not trying to spend all my money before I die so I’m good whatever happens. Bonds don’t even keep up with inflation when you use real numbers (dollar debasement).
I don’t see myself holding bonds any time soon
I disagree with the approach of buying a lot of bonds as you approach retirement. You do better to stay invested in high quality stocks and S&P 500 until such time that your time horizon to access the funds is within a year. If you are concerned about market volatility, buy gold as a counter cyclical asset, specifically GLD or GDX or a little of each. Some bonds are fine, but covered call ETFs provide more income.
I agree that you should be more focused on asset preservation after retirement but that does not mean ignoring inflation and the possibility of living 30+ years after you retire. I am basically 60% equities and 40% income with part of my income bucket in dividend and covered call ETFs. I keep at least about 2 years of withdrawals in fixed income but I am debt free, small pension and SS covers most of my mandatory expenses. I think everyone needs some growth but like the rule of 120 to reduce risk as you age (120 minus your age = % stocks).
Physical gold is king. The world’s central banks are buying up gold like there’s no tomorrow. NFA. I’ve also sliwly shifted from stocks to precious metals. As long as the Fed cuts rates, precious metals will do fine, especially with the amount of debt the US is accumulating. Foreign countries are dedollarizing and dumping US Treasuries.
The Great Recession of 2008 was caused by the collapse of bonds – credit risk.
Instead of doing stock/bond allocation do something that mitigates or distributes Risk and is what a stocks& bond portfolio attempts to accomplish.
We were 58/61 in 2008 and well aware of the sequence-of-returns. I was unbelievably scared if we could recover.
Totally depends on how much is in investments and how much is needed.
To reliably stay ahead of inflation will usually require 30-35% in stock.
Generally people shift about 1% a year or so as they age, from stocks to bonds, cd’s, hysa, bond proxies, etc.
I’m in my 40’s and 100% equities. My plan is to be no more than 33% bonds/cash equivalents when I retire. Still too far out to decide how I get there.
My fidelity bond fund has been so horrible money market would have been better.