Bond/Equity Mix During Retirement

User Forum Topic
Submitted by svelte on January 19, 2018 - 1:51pm

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.

Submitted by ltsdd on January 19, 2018 - 4:18pm.

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.

Submitted by svelte on January 19, 2018 - 6:42pm.

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.

Submitted by scaredyclassic on January 19, 2018 - 9:18pm.

40/60 sounds aggressive to me at age 30.

ignore me.

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

Submitted by henrysd on January 19, 2018 - 11:06pm.

svelte wrote:
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.

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.

Submitted by moneymaker on January 20, 2018 - 8:58am.

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.

Submitted by svelte on January 20, 2018 - 10:07am.

moneymaker wrote:
I believe the required 4% withdrawal doesn't start until age 70 1/2, please correct me if I'm wrong.

It is my understanding you are correct.

moneymaker wrote:

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

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%?

Submitted by scaredyclassic on January 20, 2018 - 11:12am.

what if the future is nothing like the past?

Submitted by henrysd on January 20, 2018 - 12:13pm.

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.

Submitted by plm on January 20, 2018 - 1:22pm.

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.

Submitted by svelte on January 20, 2018 - 2:11pm.

scaredyclassic wrote:
what if the future is nothing like the past?

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-h...

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.

Submitted by scaredyclassic on January 20, 2018 - 2:55pm.

things grow, and then they die.

our economy is different?

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

Submitted by ltsdd on January 20, 2018 - 3:24pm.

svelte wrote:
scaredyclassic wrote:
what if the future is nothing like the past?

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

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.

Submitted by scaredyclassic on January 20, 2018 - 4:03pm.

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

Submitted by carlsbadworker on January 20, 2018 - 7:36pm.

scaredyclassic wrote:
what if the future is nothing like the past?

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.

Submitted by carlsbadworker on January 20, 2018 - 8:19pm.

These two charts tell the story:

1990

2000

Obviously, it is super nice in the 20th century to invest in the U.S. stock market, which is the rosy picture of the returns that investment advisers want you to believe in. But it is definitely the exception rather than the norm.

stock-market

Submitted by scaredyclassic on January 20, 2018 - 9:43pm.

“Past performance does not necessarily indicate future results.”

i guess we just read this on every investment document we ever receive, but no one really takes it seriously.

on the other hand, how else could one guess as to furure results.

Submitted by scaredyclassic on January 20, 2018 - 10:30pm.

ive been watching old japanese movies from netflix. just finished watching "twenty-four eyes", a 1953 film about a liberal teacher in japan in 1928 who watches her students grow up to suffer or be cannon fodder. it's called 24 eyes because she has 12 students. also recently wacthed yasujiro ozus TOKYO STORY (brilliant!) and GOOD MORNING (less brilliant but also good). mainly, these old movies make me think about the vagaries of fortune, and how major reversals can occur. people int he movies who were doing great are often not doing well ina short span of time. this is probably not a good way to invest, expecting revresals of fortune...a nd perhaps money and returns on money are far less important in such circumstances. although in 24 eyes, there are lots of winners and losers too. one family prospers while another goes bankrupt, young kids are forced to work, while others do better. next up, ozu's LATE SPRING. I expect this will also cause me to make poor investment decisions.

i am extremely pleased to live ina society where i can get vintage japanese movies sent to my home by netflix for really not all that much money. I feel wealthy just being able to get them for a few bucks. in the old days, how would i ever get to see such amovie.

Submitted by svelte on January 21, 2018 - 10:08am.

carlsbadworker wrote:

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

Exactly.

Submitted by svelte on January 21, 2018 - 10:13am.

ltsdd wrote:
...If the S&P 500 return for the last 30 years is, say on average 8% per year...

I ran the numbers this week. The S&P500 was at 114 in 1980.

Projecting that forward at 8% a year says we should be at 2123 in 2018.

Projecting forward at 9% a year says 3013.

Projecting forward at 10% a years says 4264.

Looks like we are somewhere between 8 and 9 percent at the moment.

Submitted by henrysd on January 21, 2018 - 1:26pm.

svelte wrote:
ltsdd wrote:
...If the S&P 500 return for the last 30 years is, say on average 8% per year...

I ran the numbers this week. The S&P500 was at 114 in 1980.

Projecting that forward at 8% a year says we should be at 2123 in 2018.

Projecting forward at 9% a year says 3013.

Projecting forward at 10% a years says 4264.

Looks like we are somewhere between 8 and 9 percent at the moment.

That 8-9% was below the actual return on S&P from 1980 to now. Dividend yield didn't factor into your calculation, it actually can juice up the final return quite a bit. Remember 1980s dividend yield was quite high. Going forward I doubt we'll have that kind of golden bull market return from 80s to now.

Submitted by svelte on January 21, 2018 - 3:34pm.

.

Submitted by scaredyclassic on January 21, 2018 - 9:49pm.

it all just feels so unreal.

i had a job during the summer of 1981 on wall street. i was a temp. I recall counting bond coupons people sent in for payment.

those were real little piece of paper. they at least felt like something tangible, real world. they were printed on nice paper and looked kinda like money. i had to be bonded. I didn't steal any, didn't even think of it. i was proud and pleased to be handling items of high value. I remember the bank was very old school, fancy, looked like soemthing from the 1930s. I think it was chase manhattan.. i have no idea why they let me do that. i was very young.

now I barely get statements for my accounts.

numbers flit across the computer screen. what the hell is it, where is it. brokerages don't even have it, it's on some central repository Book of All Monies somewhere, only G-d knows, i suppose. it's out there though.

and it is real, of course, i mean, it's real, since we all believe in it and accept it.

but it can be kind of creepy...like we are living in some kind of mass delusion.

these "stocks", they are traded millions of times a second by wall streets robots bidding against one another, algorithms. they are bizarre signifiers of what?

if you start to think about this shit too much, you could get really weirded out. is there really something underlying those stock prices that is anything near what the price is?

does that even matter?

are stocks more like works of fine art, worth something for the value we impart to them, much more than the mere paint and canvas? are we really buying a share of a moneymaking business, or just a bet on what everyone thinks everyone else thinks someone might pay for it, like litecoin?

I mean, I put my money in them, but I do not believe in them. it feels a little like the matrix

I believe they have some value, but it is impossible to tell what that is now, let alone 20 years from now.

here's a thought experiment: what if there were no historical data on the stock market. let's say every single stock being traded were an IPO today; full, accurate disclosure of everything in the business...

do you think the stock price would be higher,lower or the same as today?

maybe the excitement of the IPO woould drive the prices even higher...but

to me, it's pretty clear the price would be a hell of a lot lower, since we are willing to pay a premium for historical performance, like it means something for the future. that's what we look at when we go to invest.

but past returns do not predict future returns, its on every prospectus. so....

people who think about shit too much tend to have worse returns, i think.

my wife's accounts always outperform mine.

i believe the correct course of action is to give your money to a robot and obey our robot kings.

Submitted by carlsbadworker on January 21, 2018 - 10:56pm.

Enjoy very much the book of "Sapiens" by Yuval Noah Harari this weekend.

As far as we know, only Sapiens can talk about entire kinds of entities that they have never seen, touched, or smelled. Legends, myths, gods, and religions appeared for the first time with the Cognitive Revolution. Many animals and human species could previously say ‘Careful! A lion! Thanks to the Cognitive Revolution, Homo sapiens acquired the ability to say. ‘The lion is the guardian spirit of our tribe.' This ability to speak about fictions is the most unique feature of Sapiens language…You could never convince a monkey to give you a banana by promising him limitless bananas after death in monkey heaven.

...

Any large-scale human cooperation — whether a modern state, a medieval church, an ancient city, or an archaic tribe — is rooted in common myths that exist only in people's collective imagination. Churches are rooted in common religious myths. Two Catholics who have never met can nevertheless go together on crusade or pool funds to build a hospital because they both believe God was incarnated in human flesh and allowed Himself to be crucified to redeem our sins. States are rooted in common national myths. Two Serbs who have never met might risk their lives to save one another because both believe in the existence of the Serbian nation, the Serbian homeland and the Serbian flag. Judicial systems are rooted in common legal myths. Two lawyers who have never met can nevertheless combine efforts to defend a complete stranger because they both believe in the existence of laws, justice, human rights, and money paid out in fees.

The value of the stock and its associated "corporation" is entirely a common belief system, a story that you could say, that helps the society functions.

Ants and bees can also work together in huge numbers, but they do so in a very rigid manner and only with close relatives. Wolves and chimpanzees cooperate far more flexibly than ants, but they can do so only with small numbers of other individuals that they know intimately. Sapiens can cooperate in extremely flexible ways with countless numbers of strangers. That's why Sapiens rule the world, whereas ants eat our leftovers and chimps are locked up in zoos and research laboratories.

Submitted by scaredyclassic on January 21, 2018 - 11:08pm.

I don't believe in G-d, but i almost believe in mammon.

the stock market is our church.

the federal reserve is the Holy Ghost.

short sellers are Jesus Christ.

Submitted by svelte on January 21, 2018 - 11:48pm.

scaredyclassic wrote:

people who think about shit too much tend to have worse returns, i think.

Agree with you. But also people who don't think enough.

There is this middle ground where you pick a good path, place your bets and walk away. It's the moving money around (timing the market) that bites people.

Shoot, even the folks who study the market day in and day out can't time it. What would make me think I have better insight than they do?

You're prone to overanalyzing things scaredy, much like me. But at the end of the day, ya gotta put your money somewhere.

Here is socal we have the added benefit of real estate being a valid option. But there are wide swaths of the country where land isn't worth squat. Just viewed a video of the downtown area of a Midwest town I lived in a few decades back. I always thought this lot in the center of town would be snapped up and built upon, probably a good investment. Well it is still empty and weed strewn today. Not worth anything. Would have been a very poor investment.

Submitted by scaredyclassic on January 22, 2018 - 10:51am.

i agree.

i wonder if my grandparents worrried about crap like this.

one grampa lost a thriving business in the depression, worked hard the balance of his life, at reduced consumption level. their apt was spartan but pleasant. i remember the couch. the dresser. old heavy wood furniture. i was happy there. they were so proud of my mom.

frankly he seemed like a very happy dude. he was always cheerful. he had not much, but it seemed like more than enough for him. he loved playing chess with us, taking us to the park. maybe he was nervous but i didnt see it. lived a long life. i wish he could play chess with my boys. he had the old pieces in a wood box. i think the set was slightly mismatched. very used, very old.

the other was more hardcharging, a lawyer who made money in business but died way too young, not much older than me. yikes.
my understanding is my dad was always searching for approval .

i doubt that grampa worried much about anything from what i hear. he made others worry.

not sure why i worry.

Submitted by FlyerInHi on January 22, 2018 - 12:17pm.

Love your comments, scaredy. They make me think.

You have to be hardcharging when dealing with the world and other hardchargers. But know not to worry. I don’t need much; my rental income will more than cover my retirement needs. Everything else is icing on the cake, even though I don’t eat cake.

Submitted by njtosd on January 22, 2018 - 12:33pm.

svelte wrote:
scaredyclassic wrote:

people who think about shit too much tend to have worse returns, i think.

Agree with you. But also people who don't think enough.

I think it's a blend. Humans have a natural inclination to learn, but for most of history important decisions had to be made within a split second. I think it is important to learn as much as possible and then try to stop analyzing and assume that what you've learned has gotten absorbed into your intuition. Warren Buffet is known for this. Both my husband and I were enthusiastic about investing in Ford in 2008 when it was at $1.50 (I'm from Detroit, he is obsessed with everything automotive). Our investment advisor was against it and so we didn't. It's gone up 800% since then.

As a hobby I buy vintage items and sell them on an e-commerce site. I made some bad buys when I first started but now I pretty consistently can sell for 3X what I buy for - often more and I haven't lost on more than a handful of items in the past few years. I used to have to read up a lot, but now I can tell pretty much just by looking at things, even without knowing a lot about them.

One of my resolutions for the New Year is to become better educated on investing, take the returns from the e commerce site and see if I can develop some level of intuition when it comes to investing. I have found the best education is losing money. I hate it, it's very motivating and very educational - but you have to be willing to do it. On the other hand my fear is that the deck is stacked against small investors. Just ordered this book by Peter Lynch yesterday: https://www.amazon.com/One-Up-Wall-Stree...

I have quite a bit of knowledge relating to the business ramifications of patent/ trademark/ copyright issues - perhaps I can use it to my advantage (no insider trading, of course). After I finish the book I'll figure out whether I want to give this all a try.

Submitted by FlyerInHi on January 22, 2018 - 2:22pm.

njtosd, I agree with regard to intuition gained from experience.

When I started buying real estate after the Great Recession, I limited myself to certain properties built after 2004. Now, I can buy anything, even sight unseen, and my returns are greater.

My brothers love guns so they buy and sell. Interestingly, it's a niche with a huge number of followers. You can make money at anything if you find your niche and become expert.

njtosd wrote:
Humans have a natural inclination to learn

Hummm.... I think most humans become self-satisfied and stop learning at age 40. In the past, that 40 was near death already.

I have a friend whom I admire greatly. He's always learning and reading. Every time I talk to him, I learn something new. But those people are rare.

Submitted by scaredyclassic on January 22, 2018 - 6:25pm.

i was learning about the Perry expedition of 1853. We went to Japan, pointed some big guns at them, and said trade with us or we will kill you.

the more things change, the more they stay the same.

as long as we can remain willing to kill anyone who dares to challenge our economic plans, our stock market should be fine.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.