Retired? You May Want Stocks, Not Bonds, to Power Your Portf

[xray]

SmartAsset
Retired? You May Want Stocks, Not Bonds, to Power Your Portfolio
Patrick Villanova, CEPF®
Sun, November 20, 2022, 9:00 AM

A retired couple enjoys a hike with their family. An expert from Morningstar argues that equities are far more important in retirement than bonds.
If you’re already retired, it may be time to rethink the role that stocks and bonds play in your portfolio. While conventional wisdom suggests that investors should shift more assets to bonds as they approach retirement, at least one expert says investing heavily in equities is the best asset allocation for retirement.

John Rekenthaler, vice president of research at Morningstar, examined market data from the last 80-plus years and determined that portfolios heavily weighted in equities allow retirees to safely withdraw more money each year than those with large bond allocations. Stock-heavy portfolios, meanwhile, led to more capital appreciation than moderate and conservative portfolios reliant on bonds.

“History’s lesson is straightforward: the more stocks, the merrier. Investing entirely in equities consistently generated either the highest safe spending rate for a given 30-year period, or a rate that wasn’t far off the mark,” Rekenthaler wrote in a recent column. “What’s more, all-equity portfolios were much likelier to deliver a happy surprise than to disappoint.” Need advice for how to best allocate your assets? A financial advisor can help. Find an advisor today.

Why Conventional Wisdom Points to Bonds

A retired woman checks her portfolio from her laptop. An expert from Morningstar argues that equities are far more important in retirement than bonds.
Various rules of thumb dictate that investors should reduce risk in their portfolios as they near retirement by increasing their exposure to bonds and decreasing their exposure to stocks.

For example, the 60/40 rule suggests a retiree’s portfolio should be 60% equities and 40% fixed-income securities. According to the rule of 110, another popular asset allocation guideline, a person’s equity exposure can be calculated by subtracting their age from 110. The resulting figure dictates how much of a portfolio is invested in stocks versus bonds. For instance, a 65-year-old following the rule of 110 would invest 45% of their portfolio in equities and keep the remaining 55% in bonds.

Because preserving spending power is often more important for retirees than actively growing their portfolios, bonds tend to play a significant role in many retirement strategies. Stocks, on the other hand, can carry more risk and be less attractive to retirees.

Why Stocks Are Preferred

A retired couple discusses their retirement plan together. An expert from Morningstar argues that equities are far more important in retirement than bonds.
Rekenthaler eschews the conventional wisdom and argues that equity-dominated portfolios are better options than conservative portfolios heavily weighted in bonds.

Using historical data, Rekenthaler calculated the safe withdrawal rates of three different asset allocations – a conservative portfolio, a moderate portfolio and an aggressive portfolio – across 30-year rolling periods between 1930 and 2019. While the conservative option comprised 90% bonds and 10% cash, the aggressive portfolio was invested entirely in stocks. The moderate portfolio, meanwhile, held 50% stocks, 40% bonds, and 10% cash. By conducting 1,000 simulations for each asset allocation, Rekenthaler found the aggressive and moderate options supported higher safe withdrawal rates than the conservative portfolio. He defined a safe withdrawal rate as “the highest amount that can be removed for all 30 years of the simulations without depleting the portfolio in at least 90% of the simulations.” In other words, despite containing more risk associated with equities, the aggressive and moderate portfolios would have given retirees more safe spending power during the 30-year periods examined. Additionally, Rekenthaler found the equity-weighted portfolio would have resulted in leftover assets after 30 years of withdrawals in each time period. On the other hand, retirees using the most conservative allocation would have run out of money during three different 30-year periods in the 20th century, according to the simulations.

Bottom Line

Retirement doesn’t mean investors should rid themselves of stocks, according to Morningstar’s John Rekenthaler. Portfolios that contain equities can support higher safe withdrawal rates than those dominated by bonds, and result in significant surpluses even after 30 years of retirement spending. While past results don’t guarantee future performance, equities should play an even larger role in the investment portfolios of retirees. “Should the future resemble the past, the lesson will remain valid. Retirees should invest heavily in equities, most likely more than they currently do,” he wrote. “But the advice rests upon that initial assumption.”

Retirement Planning Tips

A financial advisor can help you with more than just asset allocation. Some advisors can provide financial planning advice and help you develop retirement income strategies. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Do you know much you’ll need to retire comfortably? SmartAsset’s Retirement Calculator can help answer that question based on your age, salary and when you plan to claim Social Security.

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Live Long and Prosper....

[Mustang]

The article suggests that Rickenthaler used historical to study 30-year retirement periods. But he didn't. There are not 3,000 30-year retirement periods between 1930 and 2019. He is using computer simulations and probably used the historical data to calculate inputs. Computer simulation results are highly dependent upon the inputs the analyst chooses to use. Small changes in inputs make large changes in results over a 30-year period.

Wade Pfau updated the Trinity study. Using historical data he looked at retirement periods from 1926-2017. (Pretty much the same period as Rickenthaler's.) The success rates below were taken from his charts for a 4% initial withdrawal adjusted for inflation. It pretty much confirms the conclusions of Bengen's 1994 study and the 1998 Trinity Study. In Bengen's 1994 study he said, “I think it is appropriate to advise the client to accept a stock allocation as close to 75% as possible and in no cases less than 50%.”

Historic success rates for 4% initial withdrawal
Allocation Period        25 yr.   30 yr.   35 yr.   40 yr.
100% stock                 99%     94%     91%     89%
75% stock                 100%     98%      93%    92%
50% stock                 100%    100%     97%    87%
25% stock                 100%      87%     71%    45%
0% stock                     79%      44%     28%    11%

But Rickenthaler was talking about the highest 30-year withdrawal rate. Wade Pfua also showed different success rates at different initial withdrawal rates.

Historic success rates for various initial withdrawal rates. The top percent is for a portfolio that is 75% stock.  The bottom 50% stock.
Percentage         3%                 4%                 5%               6%             7%
15 years         100/100%     100/100%     100/100%      97/100%     82/85%
20 years         100/100%     100/100%     100/99%         81/79%     68/62%
25 years         100/100%     100/100%      84/85%         69/60%     59/44%
30 years         100/100%       98/100%     78/70%          59/46%     48/25%
35 years         100/100%      93/97%        69/59%          55/34%      38/9%
40 years         100/100%      92/87%        66/45%          45/17%      30/0%

I do not know if Rickenthaler changed the inputs from that used in a paper he published with Christine Benz (“What’s a Safe Retirement Spending Rate for the Decades Ahead”, November 11, 2021). Their assumptions were: equity returns 6-11%, fixed income returns 2.0-3.5%, inflation 2.1% and a 30-year payout period. Here is a comparison to Pfau’s historical data findings reported earlier. The top number is for a portfolio that is 75% stock, the bottom 50% stock. Here is a comparison of that study to Wade Pfau's.

Initial Withdrawal Rate
Payout Period     Simulations         History
15-years                 6.0%/6.4%       6%/6%
20-years                 4.7%/4.9%       5%/5%
30-years                 3.2%/3.3%      4%/4%
40-years                 2.7%/2.8%      3%/3%

I suspect he did because of current inflation. It would really be nice to know what he meant by "higher safe withdrawal rates" but it doesn't matter. His test conservative portfolio was 90% bonds. Every single study I've read whether using historical data or computer simulations says the probably of success with a bond heavy portfolio is very low.

[steelpony10]

       Trying to solve your personal unknown future needs based on unknown future market performance leads to an unknown result which makes your retirement a roll of the dice.

        

[ECE Prof]

Do his simulations include annuities and annuity-like payments from CEFs? I do not think so. In about 10-days, I will have new cash flow from them. I will feel rich then, for a few days, when I see a lot of cash in my accounts.

God bless the FED for hiking the interest rates. Many grandmas (and grandfathers too) were suffering with low interest rates with not much income except Social Security. Sad and Bad for the country to treat the elderly with this kind of indignity. You see the same every time I go to the grocery store with my wife here in Glen View, IL. The same story in Aldi and other grocery stores in here and Cookeville.

[hondo]

Good thread. I always like reading this type of thread that offer different points of view. Always gives me something to think about, although I have read many with about the same views. Using the 'rule of 110' I would have only 25% in stocks, but I would just feel uncomfortable with that small of an amount and would equally be uncomfortable with 80% or 90% in stocks. It appears to me that a 50%/50% allocation would be the sweet spot, although I am not there either.

Actually, it gets down to what a person is comfortable with and can sleep well with, even if it is not what the 'experts' say you should have.
Another thought, if a person feels they will have more than will be needed in their life, they could likely afford the risk of increasing the equities and leave a larger sum to their family.

As steelpony said, what you do can make "your retirement a roll of the dice".

Just another point of view.

[win1177]

I agree with using a stock “heavy” allocation as the cornerstone of one’s allocation. I have always been very heavy in stocks (for decades), and it has resulted in a very large portfolio. Usually have had >90% stock allocation. I retired at the beginning of 2022, and have maintained a very heavy stock allocation. We started the year at about 5% bonds, 10% cash, rest was stocks. Wound up selling nearly all our bonds when the Fed started raising rates rapidly, now have much less than 1% in bonds. We have about 15% in cash, rest is all equity (85%).

Our portfolio throws off more dividends than we need, and so the balance just goes in the portfolio and is periodically reinvested. We will leave the balance to our heirs, charity, etc. I plan on putting some of the cash back into bonds once the Fed looks closer to “finishing” their rate increases. Plan on holding about 5-7 years in bonds/ rest in cash. Since many of the stocks we own have appreciated quite a bit, we will hold them for our lifetime and let our heirs use “stepped up” basis when we pass. They can do with them as they wish one we’re gone.

Win

[mozart522]

I'm thinking that how much stock or bond one holds is an individual decision based on individual circumstances, mindsets and goals. There are no rules. All the studies are information to be used as a starting point to make decisions. How many people actually need 4% plus inflation? How many actually follow it? Jim Otar says 35% equities has been the sweet spot. This is close to Wade's. But they all use TSM and agg bond. How many people actually do that?

To me, the most important metrics are your ratio of original capital to retirement expenses. Once one hits over 25 times their options open up a lot. A person only needing a 2% withdrawal can have just about any stock/bond portfolio she is comfortable with to reach whatever goals they want. More thought should be given to pre-retirement saving and investing, IMO.

A good place to do what ifs is FIcalc.app

[bobfl]

I like Bloomberg because you can have two highly paid CIO's sitting next to each other saying the opposite. Then you cheer the one who thinks like you.

[saratoga]

I am about to retire. My equity allocation is at 65% of my portfolio. I am increasing the equity share gradually to reach 70-75% range by mid-year next year. By the end of next year, I hope (if the market cooperates) to reach 80% or higher. For me, higher risk is worth taking since I feel I NEED to grow my financial assets substantially although my basic needs are taken care of.