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Hello
I am 53 years old and want to retire at 60.
I want to put my retirement savings in something simple and safe.
What would be the downside of investing half in Vanguards Total Stock Market index and the other half Total Bond Market index and then forget about it?
Thanks
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edwood100,

Just a couple of questions first:

1. Will you be adding money to this account?

2. Is this in a IRA? Is it a Roth IRA?

3. Is this all the money that you have for retirement?

Just based on the amount of info you have given, if it were my money, I would consider putting 50% in the total bond market, 40% in the Total Market Index and 10% in the Total International Stock Index.

Yes, you will have to stomach some volatility, but over the long-term this should prove to be a good solid portfolio.

JLP

http://AllThingsFinancial.blogspot.com
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What would be the downside of investing half in Vanguards Total Stock Market index and the other half Total Bond Market index and then forget about it?
Thanks


Putting half in bonds at your age would make it very difficult for most folks to build suffienct funds to retire, or protect that fund throughout retirement. A 50/50 distribution is something a person in his early 70s might consider. I'm 55. I retired when I was 49, although I continue to do a little part-time consulting. Currently, I'm 90% in equities and 10% in fixed assets.

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If Greenspan raised the fed funds to say 8% the 2% yeild on stocks and the 5% on bonds would not look so attactive. You would most likely have done better in cash. At the rate .25% the fed funds will be 8% in 5-6 years.

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The Fed Funds rate at 8%? I don't see that happening. What is your reasoning for that number?

JLP
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edwood100,

1. There's nothing wrong with your plan. I think that's the Couch Potato Portfolio advocated by financial columnist Burns of the Dallas something or other. You might consider 60% stock 40% bond split, because you are likely to have a lot of years in retirement. I think that may now be waht Burns recommends.

2. In addition to JLP's suggestion, I would consider 40% total bond market and 10% REIT index.

Those nice dividends from the REIT index, if reinvested, will help your portfolio grow without adding much volatility. The result would be close to the portfolio I use at age 68, except I use 30% total stock market and 20% total international stock, and a combination of short and intermediate bond funds (that might better be the total bond market). Whether the domestic/ international stock split should be 40/10 or 30/20 seems to be a judgement call, and you will find advocates of both.

db
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What would be the downside of investing half in Vanguards Total Stock Market index and the other half Total Bond Market index and then forget about it?

Personally, I'm no fan of bond funds. You can lose principle as easily as equity funds. So safety is not insured. I would put the 50% in CDs instead. Otherwise, a simple plan that should suffice depending upon your needs/expectations.

JLC
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I am 53 years old and want to retire at 60.
I want to put my retirement savings in something simple and safe.
What would be the downside of investing half in Vanguards Total Stock Market index and the other half Total Bond Market index and then forget about it?

---------------

I agree with your idea of keeping things as simple as possible for several reasons - especially for cost reduction. As far as a 50/50 split - there's really nothing wrong with that either if it fits your plan and allows you to sleep at night.

The only thing that I would suggest is that you take a look at some of Vanguard's "Target Retirement" Funds where you get most, if not all the diversification you really need in a single fund. The mix automatically changes to a higher bond fund exposure as you approach your targeted retirement year. You can't get much easier then that - a true "Feed-it-and-Ferget" Fund:

http://tinyurl.com/4avx8

Or you might like the "Life Strategy" Funds better. They are also fund of funds which are well diversified, but the mix stays the same:

http://tinyurl.com/6y8jj

There are a bunch of ways you could go with your retirement savings, but your personal situation has it's own unique characteristics that only you can deal with. So, as always, we all have to be the final factor in what we decide to do.

Regards,
Bill
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Author: edwood100 | Date: 2/17/05 11:20 AM | Number: 44676
I am 53 years old and want to retire at 60.
I want to put my retirement savings in something simple and safe.
What would be the downside of investing half in Vanguards Total Stock Market index and the other half Total Bond Market index and then forget about it?


From your comments, you are risk averse and are concerned primarilly about SAFETY. That says that you have enough money to retire and are not worried about additional growth.

Under these conditions, the 50/50 portfolio that you mentioned sounds very reasonable. It will be relatively safe (though it could lose as much as 20% in a bad year), and it has historically generated about 7% per year total return, which should offset inflation. But, it probably will not increase in value if you are withdrawing anything from it.

If you need to withdraw the maximum amount, historically 4% per year, from your portfolio after you retire, and want it to survive for for 30 years or more, then you probably want to use a 60/40 stocks/bonds mix. From historical data, we can see that about 90% of the time, a 60/40 mix has allowed an initial 4% withdrawal, and then indexing upwards with inflation each year for 30 years. If you test the 50/50 mix, under the same withdrawal needs, it will survive about 75% of the time.

Russ
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Putting half in bonds at your age would make it very difficult for most folks to build suffienct funds to retire, or protect that fund throughout retirement. A 50/50 distribution is something a person in his early 70s might consider. I'm 55. I retired when I was 49, although I continue to do a little part-time consulting. Currently, I'm 90% in equities and 10% in fixed assets.

I have read several studies (sorry, no link) based on the Ibbotson data which show that for the long term investor, loading up with bonds is a bad proposition. No less than 70% eqities is safer, no matter how old you are.

cliff
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cliff,

What you say is true. However, most retirees don't see it that way. Too many retirees are too conservative with their assets. This was fine and good back in the day when you lived 5-10 years in retirement. However, now days people are living 20-30 years in retirement. If they invest too conservatively they risk losing purchasing power to inflation.

Although it is a book written for financial advisors, I think everyone should read Nick Murray's "The New Investment Advisor."

JLP

http://AllThingsFinancial.blogspot.com
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Ed you really have not given enough information for anyone to hardly even ask questions.

I have read all the replies and I still have yet another quesition. To answer you question really depends on how much money you are investing relative to your desired income at age 60. If you are investing 10 million and you want $150,000 a year with increases for inflation, you are fine -- stick it in and forget it. I think it safe to say most replies don't think this is your situation.

If you have say $250,000 and you want to start taking out say $25,000 a year when you are 60 and have increases for inflation -- your plans has some serious problems if you expect to live more the say 15 or 20 years in retirement i.e. you will have an empty account.

Gordon
Atlanta
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It was 8% in 1990.
http://www.federalreserve.gov/fomc/fundsrate.htm

Sir Alan has stated that he is going to keep raising rates. If he raises 1% a year no problem. In 1991 rates dropped 3%, why cna't they go up 3% / yr.
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I'm 55. I retired when I was 49, although I continue to do a little part-time consulting. Currently, I'm 90% in equities and 10% in fixed assets.

I have read several studies (sorry, no link) based on the Ibbotson data which show that for the long term investor, loading up with bonds is a bad proposition. No less than 70% eqities is safer, no matter how old you are.


Cliff,

I think you may have the ratios backwards here.

First, the oft sited Ibbotson data (if we're thinking of the same thing) shows that between 1926-1998 (I using IAA by Bernstein for this p.43) adding up to 30% equities to a bond portfolio increased returns by 2% while maintaining a static SD (volatility or risk) of 9%. A 70% equity port was much riskier- a SD of 16%.

And while this pretty neat fact, it's misleading in that it ignores the fact that bonds can be held to maturity, in which case the (at least nominal) SD of their returns would always be zero, and it would be impossible to further reduce risk with stocks.

It's also misleading in that past data doesn't necessarily predict the future. Either from a return or risk perspective. As Dr. B likes to say, bonds could easily outperform stocks over the medium term at least.

You say for "long term investors, no matter how old they are"...this sounds like a contradiction since the older you are, the shorter your time horizon. If you're 55 and 6 years into retirement, and making a 5% withdrawal per year (for example), you could be wiped out with a 90%/10% allocation if P/E revert to the mean over the next few years. That allocation is extremely aggressive.

Nick
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…I am 53…safe …

There are no long-term investments that are truly safe. You only get to choose they type of risk you take. Even government bonds have inflation and rising interest rate risks.

For retirement planning you normally hear people talking about living off their savings, social security, and pensions, until they are 90 or 95. One way to look at your asset allocation is to look at when you will be spending the money. You might want to set a budget of what you will need when you are 80+, 65 to 79, and less than 65. Unless you have a huge retirement fund then putting the money for your later years in bonds may be risking running out of money before you die because of the inflation and rising interest rate risks.

I agree that adding some more international exposure would be good idea but don't go overboard, as I recall about 30% of the S&P 500 companies' earnings already come from international operations.

The targeted funds all tend to be too conservative for most people because the asset allocation that they use does not take the rest of your financial picture into account. For example if you have a house paid off then one option you will eventually have if you live into your 90's you may very well be able to plan on eventually selling you house when you are in you are ready to move into some sort of assisted living situation. This would make a huge difference in how to allocate your retirement funds and the people managing the targeted fund are not taking this into account.

Greg
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You say for "long term investors, no matter how old they are"...this sounds like a contradiction since the older you are, the shorter your time horizon. If you're 55 and 6 years into retirement, and making a 5% withdrawal per year (for example), you could be wiped out with a 90%/10% allocation if P/E revert to the mean over the next few years. That allocation is extremely aggressive.

I agree that 90/10 is extremely agressive for a truly retired person. At 55 however, I'm guessing he's taking these risks because he could always go back to work if he had to...

If you're 55, you must remember the 70s...

1/1/73 S&P 500 was at 118
1/1/75 S&P 500 was at 68
1/1/82 S&P 500 was at 122 (and then started heading up, up, up)

Anyone who was "really" retired (unable to work) and withdrawing money each year would have been seriously hurt if he or she was in 90/10 stocks/bonds from 1973-1982. However, at least the dividend yield was 4-5% during those years.

Now the dividend yield is less than 2%....

Do you really think that a stock market like 1973-1982 can't happen again? It can, and conditions are right for it do so - based on history. It doesn't mean it WILL happen, but it's certainly possible.

I wouldn't be 90/10 at this time if I was retiring soon.



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If you're 55, you must remember the 70s...

1/1/73 S&P 500 was at 118
1/1/75 S&P 500 was at 68
1/1/82 S&P 500 was at 122 (and then started heading up, up, up)

I well remember those years, and the 60's. I recall a WSJ headline about the DOW and the S&P500 which went like this: Blue Chips or Blue Gyps? Pity ye widows and orphans. ... This was in the gunslinger era, when conglomerates were catching on. Nobody wanted the staid old blue chips. They wanted GROWTH and forget that stodgy stuff. Well, in the course of time the gunslingers got carried out feet first, and the S&P was rediscovered. I personally believe the S&P is overpriced in todays market. I don't have an S&P index in my portfolio, quite the opposite, I have the Vanguard Extended Market Index Fund, which is the Total Market Index Fund less the S&P 500.

The studies I recall took data for many combinations, for various mixes of stocks and fixed income securities, for various periods, and assumed a 5% withdrawal rate. The articles I mentioned date from the 1980's. I have a printed copy around here somewhere. The safest combination for long term was between 60 to 70% equities. I think Intercst's (from REHP) data show a similar thing. I actually took his data and plotted 30 year SWD versus starting year for various mixes, from 100% stocks to 100% fixed income. Interestingly, two years were pivotal: 1929 and 1968. Those two starting years dominated the rest completely, and a 60-70% equity mix was still "safest".

YMMV.

cliff
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A word of warning regarding the safety of stocks, even over the long term:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=476981

I don't have the full article, but it was quoted in the Economist recently.

Nick
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Darn it, why'd I go and read this article? That's really sobering.

Sorry for revisinging this thread from 3 months ago.
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