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Author: mawhinney Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75776  
Subject: No bonds??? Date: 6/1/2005 2:15 PM
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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?
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Author: bighairymike Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46293 of 75776
Subject: Re: No bonds??? Date: 6/1/2005 2:20 PM
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I read somewhere, and I came to agree with the thinking, was to treat my pension like a paid up annuity and count it towards satisfying the fixed income portion of my asset allocation. Some would say to treat Social Security in the same fashion. I am not eligible for SS for seven more years so don't count SS towards anything. I do have a bond fund to bring me up to the target fixed income in my asset allocation.

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46294 of 75776
Subject: Re: No bonds??? Date: 6/1/2005 2:25 PM
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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 have seen studies based on the Ibbotson data which "prove" that 40% bonds is not as good as 20% bonds for the long haul. They did a series of scenarios based on ten year holding period, 20 years, and 30 years for every period for which data was available. They ran mixes of S&P 500 and bonds in 5% increments from 0% bonds to 100% bonds. They used a 5% withdrawal rate. The portfolio which was least likely to go broke had very little bonds.

Sadly, I have lost the original article, and I have been unable to re-find it. (Actually, I had several articles, all more or less in agreement.)

Ultimately, the "right" mix depends on the withdrawal rate as much as the mix.

I would appreciate any other opinions (no, not opinions; fact-based research) on the subject.

Intercst's work seems to indicate a 4% withdrawal rate is safe for every period for which he has data with a 40-20% bond mix.

cliff

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46296 of 75776
Subject: Re: No bonds??? Date: 6/1/2005 2:53 PM
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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?


Most financial planners are full of prunes.

Here is an interesting article.

http://www.fpanet.org/journal/articles/2001_Issues/jfp1201-art6.cfm

He quotes Bill Bengen's work and another by Gordon Pye showing their conculsions on SWR's and on "conservative" mixes.

"In follow-up analyses, Bengen found that if he changed the asset allocation mix, he changed the sustainable 30-year withdrawal rates, which tended to peak at around 4.3 percent at stock allocations of between 50 percent and 75 percent.2 When he looked at rolling 30-year periods taken quarterly rather than annually, he found that the highest sustainable withdrawal rates were almost exactly the same, but were experienced in portfolios whose stock allocations fell in a narrower range between 55 percent and 65 percent.3

A subsequent analysis by Gordon Pye offered similar but not identical results. Instead of using actual historical returns, Pye created a Monte Carlo simulation model, which evaluated possible sequences of future returns on various asset categories. The Monte Carlo simulation tool created by Pye basically takes the range and standard deviation of historical returns and inflation and simulates possible future outcomes of these variables. Over a relatively short ten-year retirement period, Pye found that a stock portfolio was able to sustain withdrawals of four percent of the initial portfolio, inflation-adjusted, in 92 percent of the hypothetical future sequences of returns. When the analysis was extended to 20-year and 35-year time horizons, the 4 percent liquidation rate succeeded more than 80 percent of the time."

He then goes on to report his own findings. He has a figure which shows that for ANY mix of stocks and bonds, a 3.5% withdrawal rate (over a 30 year retirement) was the maximum safe rate for the period from 1964 to 1970. If you retired in that period, the maximum safe withdrawal rate was 3.5%. He has four model portfolios, a "conservative (20% stocks, 50% bonds, 30% cash)", "balanced (40%, 40%, 20%)", "growth (60%, 30%, 10%)", and "aggressive (85%, 15%, 0%)". His finding is counter-intuitive:

"the aggressive portfolio almost always outperformed the alternatives as an income-producing vehicle, and where it did underperform, the difference was relatively small. The same is generally true of the growth portfolio compared with the balanced, and the balanced compared with the conservative."

Aggressive is 85% stocks, 15% bonds. Draw your own conclusions. And don't base them on a single article.

cliff

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46298 of 75776
Subject: Re: No bonds??? Date: 6/1/2005 4:23 PM
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Most financial planners recommend retirees hold 40% of their funds in bonds or fixed investments.

Most financial planners are crooks and frauds. They make tons of money when they get folks to sell out of stocks and buy bonds, which is where this stupid advice comes from. For anyone under 80 to have 40% in bonds is shere madness.

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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: 46299 of 75776
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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Author: FrugalSpeculatr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46300 of 75776
Subject: Re: No bonds??? Date: 6/1/2005 5:09 PM
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40% for bonds is a rule of thumb used by some.

Another way to look at is, is to keep ~5 years worth of living expenses in CD's and the remainder in equities. The bigger the portfolio and the smaller the expenses on a relative basis will allow on to put more or less into CD's.

FS

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46301 of 75776
Subject: Re: No bonds??? Date: 6/1/2005 5:13 PM
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>> Another way to look at is, is to keep ~5 years worth of living expenses in CD's and the remainder in equities. The bigger the portfolio and the smaller the expenses on a relative basis will allow on to put more or less into CD's. <<

That's sort of a simplified "buckets of money" strategy, but only using two buckets instead of three.

#29

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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: 46302 of 75776
Subject: Re: No bonds??? Date: 6/1/2005 5:22 PM
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Author: FrugalSpeculatr | Date: 6/1/05 5:09 PM | Number: 46300
Another way to look at is, is to keep ~5 years worth of living expenses in CD's and the remainder in equities. The bigger the portfolio and the smaller the expenses on a relative basis will allow on to put more or less into CD's.


I have tried this (buckets of money) approach, and, in theory, it should work. However, you wouldn't believe how hard it is to liquidate a year's living expenses from your stocks to buy CD's, when your stocks are increasing nicely and you won't need the money from the CD's for another five years. It is very very tempting to just skip the liquidation, and now you have only 4 years of CD's, and it will be nearly impossible to liquidate 2 years of expenses next time.

I finally abandoned this approach, because I didn't believe I could maintain it over the long term.

Russ

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46305 of 75776
Subject: Re: No bonds??? Date: 6/2/2005 3:52 PM
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If you don't have to worry about taxes, if you have no emotional involvement in your investments and if you believe what happened in the last 100 years will happen in the next 50 years probably a good idea.

On the other hand consider the people in say 1955 who thought that way.

Personally I like the RetireEarly.com approach. Stick it in an index, pull out for a few years. Very hard to sell individual stocks when they are up.

Gordon
Atlanta

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Author: OldOne Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46308 of 75776
Subject: Re: No bonds??? Date: 6/3/2005 1:17 AM
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Absolutely there is.

This rule of thumb takes no account of any income a retiree might have from SS or a pension.


In the "Four Pillars of Investing" Bernstein recommends capitalizing SS at about 5% (divide annual SS payment by 0.05) and pensions at 6-12% depending on the soundness of the company paying the pension.

I personally would capitalize SS at 4% if I was going to use a 4% SWR, and other pensions at a 5-10% rate, but that is just because my estimate of the risk in SS is that is is negligible for any current retiree.

Then apply the 40% rule to the total portfolio, including the "phantom" bonds arising from capitalization of SS and pensions.

Many retirees will find that it is difficult to maintain enough of their portfolio in stocks. For instance, at 5%, $15k of annual SS payment is equivalent to $300k of bonds. Throw in a pension and you will need to have upwards of $500k in your portfolio before you should even consider bonds.

DW and I both have pensions from very solid sources (hers is from a state government, mine is from a very large defense contractor), and SS. I feel very comfortable with 95% of our portfolio in stocks and rental real estate. If disaster ever overcame the portfolio, we would be able to make it quite nicely on the pensions plus SS.

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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: 46309 of 75776
Subject: Re: No bonds??? Date: 6/3/2005 12:51 PM
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Author: OldOne | Date: 6/3/05 1:17 AM | Number: 46308
This rule of thumb takes no account of any income a retiree might have from SS or a pension.


Actually it does. With the 4% rule, you calculate how much additional money you need to withdraw from your portfolio each year for basic living expenses after after your pensions and SS.

In the "Four Pillars of Investing" Bernstein recommends capitalizing SS at about 5% (divide annual SS payment by 0.05) and pensions at 6-12% depending on the soundness of the company paying the pension.

I personally would capitalize SS at 4% if I was going to use a 4% SWR, and other pensions at a 5-10% rate, but that is just because my estimate of the risk in SS is that is is negligible for any current retiree.

Then apply the 40% rule to the total portfolio, including the "phantom" bonds arising from capitalization of SS and pensions.


This method is perfectly valid, but it can result in a portfolio that is much more volatile than one set up on the basic 4% rule.

Many retirees will find that it is difficult to maintain enough of their portfolio in stocks. For instance, at 5%, $15k of annual SS payment is equivalent to $300k of bonds. Throw in a pension and you will need to have upwards of $500k in your portfolio before you should even consider bonds.

DW and I both have pensions from very solid sources (hers is from a state government, mine is from a very large defense contractor), and SS. I feel very comfortable with 95% of our portfolio in stocks and rental real estate. If disaster ever overcame the portfolio, we would be able to make it quite nicely on the pensions plus SS.


I am willing to bet that if you add up your pensions and SS, you have enough income for most of your needs. What percentage do you have to withdraw each year from your portfolio to meet your basic living expenses?

Russ

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Author: drippinfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46334 of 75776
Subject: Re: No bonds??? Date: 6/4/2005 12:22 PM
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rkmacdonald wrote:

"I have tried this (buckets of money) approach, and, in theory, it should work. However, you wouldn't believe how hard it is to liquidate a year's living expenses from your stocks to buy CD's, when your stocks are increasing nicely and you won't need the money from the CD's for another five years. It is very very tempting to just skip the liquidation, and now you have only 4 years of CD's, and it will be nearly impossible to liquidate 2 years of expenses next time.

I finally abandoned this approach, because I didn't believe I could maintain it over the long term."


Sounds to me like a discipline issue. Human nature allows emotions to guide our investment decisions, making it difficult to consistently buy low and sell high. We find it hard to let go of "winners" and latch on to "losers." The "buckets of money" approach requires (and forces, if followed religiously) us to do just that - buy low and sell high. Is there any other way to profit from your investments? A few years ago TMFPixey wrote a series of articles on building a comfy retirement cushion. I have kept them and refer to them often. If they're still in the archives, I'll post a link in my next message.

-drippinfool

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Author: drippinfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46335 of 75776
Subject: Re: No bonds??? Date: 6/4/2005 12:45 PM
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Here's the link to the article on the retirement cushion. It contains a link to the previous article.

http://www.fool.com/retirement/retireeport/2000/retireeport000417.htm


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