Finding the Right Stock/Bond Mix in Retirement
Retired readers discuss their current allocations and the considerations behind them.
This past week was Model Portfolios Week on Morningstar.com, which featured articles and videos on hypothetical portfolios for retirement savers and retirees. Using that as a backdrop, we decided to ask Morningstar.com readers who are currently in retirement what their current stock/bond allocation is and why.
As our readers know, asset allocation is one of the biggest portfolio-planning decisions an investor will make. The optimal asset allocation for any individual is a very personalized decision--taking into account other sources of income, longevity assumptions, desire to leave assets to loved ones, and more.
The responses to our query reflected this diversity. For instance, some respondents, many of whom are well into retirement, prefer a heavy allocation to equities despite conventional "age-based" rules. Meanwhile, other investors hew to a more "traditional" 60/40 stock/bond (and cash) allocation, or something close to it. There were still others who reported that their portfolios are invested more conservatively, with low or even no equity exposure.
What follows is a sampling of what readers had to say. To read the full discussion and weigh in yourself, please click here.
Sizable Allocation to Stocks
Some retirees noted that they are quite comfortable remaining heavily invested in equities. Some of these stock-heavy investors said they are planning for the likelihood that they will live a few more decades and don't want to outlive their assets, while others noted that they planned to bequeath the assets to future generations. For many in this camp, however, a required minimum distribution from an IRA or retirement-plan account, or pensions or Social Security distributions, gives them a bit of freedom to invest more aggressively.
For instance, plskmn, three years into retirement, is 100% invested in equities. Although this reader notes that this equates to taking the "so-called risky route," some mitigating circumstances may help reduce the risk. Among them, the couple downsized their home and moved to a lower-tax area; their medical needs are covered for life; and their "pension and Social Security produce just enough for a very modest (but safe) lifestyle."
"My wife and I are both 73, and we both retired five years ago," said GregLee. "Our portfolio is 98% stocks (because stocks have higher expected returns). We do not need to withdraw from our portfolio for expenses."
Ditto for Reti59: "Allocation is 80% stock/20% bond because I have a pension and sufficient savings. The large stock allocation is risky, but I want the growth that stocks give."
"I reject the conventional theory of reducing equities as one ages," added martina. "Inflation, potential long life and unforeseen circumstances create uncertainty in retirement and one needs the wherewithal to meet these challenges."
"My wife and I have been retired for three years and have pensions that fully cover our expenses," said Will350, whose portfolio consists of about 90% dividend-paying stocks and 10% cash. Although this reader concedes that this is "somewhat aggressive" and exposes the couple's portfolio "to the vagaries of the market," Will350 also notes that "we have a long-term perspective, with an eye to our beneficiaries."
Meanwhile, GlennB8 doesn't allocate to bonds at all. "I own 80% dividend-paying stocks, 20% cash," this reader said. "You get a growing dividend rather than a static payout."
60/40 (or Some Variation)
Other investors are more comfortable with a more "traditional" 60/40 stock/bond (and cash) allocation, or something in that ballpark. (Though, of course, within the 60/40 framework there exists much room for variation.) According to many readers, this allocation suits their needs from a current-income standpoint while also allowing for longer-term appreciation.
For instance, Uysses' current and long-term target allocation is "60% equity, 40% fixed income": "My target is based on my estimate of the largest equity percentage that I can hold and still tolerate a 50% market decline and not have to significantly change my lifestyle."
This point is echoed by FundHunter, who is currently in retirement but working part time and taking Social Security benefits. "100% equities in a retirement account is fine for a person in their 30s with a strong stomach, but is insane for somebody retired in the withdrawal stage." This reader notes that the couple's portfolio is "about 45% fixed income, 55% equities with about one quarter of equities being international. Fixed income is mostly short-term bonds, no junk. No gold and no cash, (except what is contained in the various mutual funds)."
Darwinian, after applying a stress test using worst-case scenarios modeled after 1929 or 1969, settled on an allocation of "35% high-performance, high-volatility stock, 30% more conservative stock, and 35% intermediate-term bonds." Darwinian added, "When I actually retired last year, I moved about 6% of the fixed income to short-term bonds and cash, for portfolio insurance (protection against having to sell something at a loss). This remains my long-term target allocation."
Tomas47, who notes that Christine Benz's bucket approach to retirement-portfolio construction has been influential, says 60% equity/40% fixed income has worked so far (12 years into retirement), and the plan is to stay at that allocation. "If I had 'strictly' followed the approach of two years' cash and eight years' fixed, I would have a 70/30 allocation, but was not comfortable with that potential volatility so dialed it back to 60/40."
JHAsheville is also an adherent of the bucket approach, as it "helps us see clearly a way forward when the markets get a little murky around the edges." This reader reports an allocation of "56% stocks, 40% bonds, and 4% cash," and notes that although that allocation varies a bit from time to time, "it's fairly easy to tweak when needed to keep it in line with our planning."
Dad1951, who plans to retire very soon, says that a defined-benefit pension at age 65 will cover about 20% of spending. "Waiting till 70 for Social Security, which will cover at that time (with spousal benefit) almost 30% of spending. Portfolio is 60% equity; 25% bond and 15% cash/cash equivalents. Need to draw about 6% annually now, but that is reduced as pension and later SS kick in to reduce total draw to about 3% of assets annually."
"I'm at 65/20/15 ... which seems reasonable for someone years from drawing SS, yet semi-retired (earning a bit of money each year doing a little consulting)," said freeland. "As I am planning for the 'worst' case of living a few more decades, reducing equity further seems foolish. I feel I should maintain enough cash and near cash to handle a market swoon lasting three to five years. Some of that cash can come from maturing individual bonds, some from 'near-cash' bond funds."
Some respondents, meanwhile, revealed that they prefer to maintain more-conservative allocations, with low or even no equity exposure. For many of these investors, it just isn't worth risking the nest egg they've spent years working to accumulate.
"If there is a several-year decline, we feel sure the market will come back, but we may not have the time to wait it out," says hondo. "So why risk what we have worked so hard for, at the time when we may need it the most, (the final years). Therefore, we are invested 30% to 32% equity/68% to 70% bonds. A very conservative, simple portfolio of all balanced funds, so that rebalancing is not necessary."
TallyMan reports that the most recent quarterly statement of combined accounts revealed around 15% equities, 85% fixed income/cash. "We tend to be risk averse, and the percentage of equities is low even for us," this reader noted. "Reasons: A high priority in early retirement is to avoid any significant losses; a concern that the stock market may be overvalued; and, probably will only need less-than a 2% withdrawal rate."
Jkirkmd, who is currently at 50%/50% equity/fixed income, has felt it prudent lately to dial down equity exposure. "Recently, I was at 55%/45% (equity/fixed), but in order to protect (as much as possible) from sequence of return risk, and being three years from retirement, I am on a glide path to 45%/55% (equity/fixed). With the current market volatility, I'm quite comfortable with my asset allocation and plans for the future."
Likewise, Greybeard is currently 42% equities, 45% bonds, and 13% cash, as a result of "a flight to cash within my IRA a year ago due to market volatility and the need to have at least a couple of years' RMDs protected from turmoil." And this reader has not regretted this decision: "If the downturn/correction/bear market lasts two years I should still be positioned well."
Waiting for Rates to Rise
Finally, some readers said that while their portfolios are currently heavily invested in equities and/or cash, this is not necessary in line with their long-term plan; rather, they are awaiting a good entry point to buy bonds.
"I gradually sold practically ALL my bond mutual funds and ETFs before the correction and re-invested nearly all of it in equities after," said DanielMRoy. "When the Fed tightens, I will gradually buy back. In the meantime, I have dividend funds ( Vanguard Dividend Growth (VDIGX), Vanguard Dividend Appreciation ETF (VIG), Global X SuperDividend ETF (SDIV), and so on). I am aware of the risks since I am 67 and retired!"
Two years into retirement, trinibeens has a current allocation of 69/14/17, awaiting an increase in interest rates. "I'm holding the 17% in cash for when rates go up and I decide to pay off my mortgage. I don't intend to hold any more than 15% in fixed until rates go much higher."
Already several years into retirement, jjdenver's portfolio is currently 55%-60% stocks. This reader said that while the remainder "should be in bonds," similar to some other respondents, fears of rising interest rates several years ago led jjdenver to "move a lot of that money into cash, waiting for bonds to drop in price."
GaryDH, who reports a 100% allocation to equities and 0% to bonds, agrees. "I will acquire bonds (20%) when they produce a reasonable return compared to dividend-paying stocks."
Karen Wallace does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.