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Investing/Strategies / Retirement Investing
|Subject: Re: Asset Allocation||Date: 4/6/2006 10:23 PM|
|Author: DrTarr||Number: 50962 of 76080|
#29 (who is actually vested for a puny pension with a previous employer, to the tune of $250 a month at age 55 or $620 a month at age 65, which will buy one gallon of gas by then)
Ya, but will you need the gas?
Welcome to the board. I hope that some of the posts don't drive you away. Seems a lot of pent up frustration with opposing views leads down that name calling road.
And of course - now I am going to post some of my opposing views!
What is the best asset allocation for someone either retired or on the verge of being retired?
The best allocation depends on several factors, some of which can be known at the time of investing - or the time of retirement, such as:
What are the goals, dreams of the individual/couple retiring? How much money will that take? How much will they need? Then how much do they have? - How much will be filled through SS/ Pensions etc.
-That will leave what they need to take out of the retirement account.
Then, with the amount they have and given current yields, and historical returns, what allocation would give them the money they need - within the RISK TOLERANCE of the retirees.
From this you can decide the best "theoretical" allocation.
There are three reasons to invest in bonds:
If the person has some risk adversion. Bonds will decrease the "volatility" but usually at the cost of some returns.
If the bonds will provide the return they need, then why risk more than you need. IF the bonds get to a point taht rival the hsitorical returns of other asset classes, why not load up on more bonds?
If the people are happy with bonds. Always an investing decision.
Given these three things (and the level of each) you determine how much of your portfolio to put into bonds. There are many studies out there that show different equity/bond allocations, but most of them only use the two asset classes and are not very diversified. ie they use the S&P500 and US Treasuries - two of my least favorite investment tools. From these studies, the show that "historically" about ~4% can be taken out and the retirement portfolio balance will last 30 years - but this is given the absolute worst (recent) history has. And this has the two assets I mentioned. So using that, many folks come up with 25 times the amount you will be spending.
This 4% is really only a first year estimate and is a reasonable target. Although if you include several other asset classes, real estate, precious metals, foreign and high yield debt and diversify to more equities than the S&P500, a portfolio can actually survive history with over 5% inflation adjusted withdrawal rate. You would then need about 20 times the annual amount you plan to spend from the account.
The reason I call the 4% a target is because, if you have returns of 15%, then you could take out at least 10% and still have a better chance of you portfolio lasting 29 years than in the historical testing.
Not suggesting you always take out the full returns, but just to note, if 4% is the worst maybe you are not getting the worst and you should be able to enjoy your retirement!!
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