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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Re: No bonds??? Date: 6/1/2005 4:51 PM
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Author: mawhinney | Date: 6/1/05 2:15 PM | Number: 46291
Most financial planners recommend retirees hold 40% of their funds in bonds or fixed investments. Is there ever a case for a retirement portfolio to hold little in the way of bonds?


I know a lot of very reputable financial planners. In general they are knowledgable, and they do eveything they can to make you a happy retiree. There are also a few bad apples that give the whole industry a bad name.

Anyway, the stock/bond split is simply a way of managing risk (and there are other ways to manage risk). If you have lots of money and don't need to take a large annual withdrawal, then you have the luxury of shifting into more stocks and less bonds, because if you lose it, it won't hurt you.

On the other hand, most people need every bit of the 4% annual withdrawal (indexed with inflation) so that forces them to use around a 60/40% stock/bond split.

If you find yourself in the unenviable position of needing more than 4% per year, then you might be forced to invest more aggressively in stocks in hopes of increasing portfolio growth. This is a very dangerous thing to do, however. It is much better to find a way to live on less.

Most planners would tell you that in retirement the name of the game is minimizing risk to the level that just supports your required annual withdrawal. If you have lots of money, and only need a 1% or 2% annual withdrawal you might even want to be 100% bonds, if you really don't handle volatility well.

Other, rare individuals with lots of money, like to take risk and invest in 100% stocks. This is fine if they can afford to lose a large percentage of their money in a single year without losing sleep. The cases where I have seen this are when a person is living exclusively from dividends that amount to a low percentage withdrawal per year. I know of one retired widow who owns only XOM and hasn't got a clue what the price per share is. That's not what I would do, but she is happy with it, and with only a 2% annual dividend it seems pretty safe to me.

Russ
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