A customer recently asked me if it were a good rule of thumb to make the percentage of his portfolio invested in bonds equivalent to his age. I don’t believe that’s a good rule. Relying too much on fixed-income investments isn’t any better an idea in retirement than it is before retiring.
With the interest rates we’ve seen since the “Great Recession,” an investor just can’t make it to retirement successfully with a bond-heavy allocation. Consider this: The returns on equities versus bonds during the last two decades has been 9.5 percent and 4 percent, respectively. The market has enjoyed a bull run during the last six years. So, many people like the idea of being more growth oriented with their investments. That’s a corollary to the investor who becomes too conservative as they enter retirement. But there’s no reason to ratchet back or dial up with your assets in stocks. Rather, look at the numbers. What do you believe you’ll need to live comfortably in retirement? That number is different for everyone.
As I’ve written in past blog posts, the key to retiring successfully is sticking with a plan that doesn’t shift like a weather vane with every economic gust.
Once you’ve arrived at the calculation of how much you’ll need to retire comfortably, look at what a bond portfolio might yield for you. Assume a 2 to 3 percent annual rate of inflation. You may quickly find that overinvesting in bonds will over time become a money loser, even though it sounds conservative to rely on a greater percentage of bonds than stocks.
Let’s also consider Social Security. Gallup regularly polls Americans on their expectations about Social Security. Interestingly, about 50 percent of non-retired Americans say they expect Social Security to be a minor source of their income, or no source at all. Yet, about 60 percent of retired Americans in the same surveys say Social Security is a major source of income.
That’s quite a perception gap. Remember to factor in what you expect to get from Social Security as well as when you plan to begin collecting benefits. Once you begin collecting Social Security benefits, you may even decide to become a little more growth oriented with your portfolio.
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