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Bond/Equity Ratio for a Typical Retiree

beebee
edited July 2014 in Off-Topic
It wasn't until I retired that I realized the trade off I faced regarding my financial needs (money to meet my monthly budget) during the distribution phase of life verses the accumulation phase of life. The "working for retirement" world I was leaving had arranged all of these financial buckets one way and at retirement I realized these buckets needed to be rearranged quite differently.

In retirement, my income would be derived from a "bond like" combination of pension income, Social Security income, and Annuity income(plus maybe part time work, rental income, etc.). All of these are "bond like" in nature...some with inflation adjustments, but all grossly conservative.

For simplicity, a $50K retiree income might need a $1.25M bond portfolio that could consistently pay out 4 % / year. If I were 65 at retirement this "$1.25M Pension/SS/Annuity equivalent" might be considered 65% of my investment worth (based on Bogle's bonds=age axiom). Therefore, I would need an additional $437,500 invested strictly in equities to properly allocate the remaining 35% of my overall (net worth) to come up with a 65/35 mix.

edit Disclosure: I am nowhere near these kinds of numbers, yet I am trying to assign an asset value to this $50K income stream as well as "grow" my "non-bond-like" 35%.

Most of us in retirement don't think of our Pension / SS / annuities as "bond distributions" as we spend these proceeds on a monthly basis, but they really are. More importantly, most of us probably don't need more than 20% of our remaining investment portfolio in bonds when we retire at age 65. This additional 20 % bond position in our retirement portfolio serves more as buffer to the risk dynamics of equities more than anything else.

As retirees we need to gamble for a little more return using vehicles that return greater than 4%.

If we don't get it we eat leftovers...if we do, we take the wife out for dinner.

Your thoughts?

Comments

  • It makes good sense considering that we are all living longer.
  • edited July 2014
    bee, I'm in the phase obsessing about when enough is enough so any retirement posts gets my attention. I'm probably misreading your post, but do we all want to die rich? Is there anything wrong with drawing down *some* principal in retirement if necessary? Are you saying above that a 65 year wanting a 50K retirement income needs 1.25 million bonds (or is that a bond-like equivalent from SS, pensions and whatever else) and another $437,500 (equities) equating to a portfolio of $1,687,500? Then 4% of that generates the 50K income? So what happens to the $1,687,500 at death? A legacy to children, grandchildren, charities, environmental organizations, or God forbid, nursing homes (all great causes mind you sans the nursing care) Some might say enjoy the $1,687,500 pursuing our passions in retirement because we earned it. And not to fret endlessly about preserving it all with 4% or whatever returns.

    Edit: Of course, only 1 in 20 U.S. households even have $1,000,000 in investable assets.

    Edit#2

    http://finance.yahoo.com/news/column-surprise-even-wealthy-retirees-164826316.html

    I guess the above the above study from Vanguard on "wealthy retirees" answers my questions. Note the median value of their financial assets ex housing.
  • @bee
    LT care insurance--- what funds that?
    You can get a lot more, for a lot less, right now.
  • beebee
    edited July 2014
    @ Junkster

    Even with a draw down strategy aren't we still talking close to $1M over a 30 year time frame? Trying to figure out how to generate $50 K of income (with colas) over 30+ years was a real challenge for me and my pre-retirement portfolio.

    I spent countless hours going through these iterations myself so I can appreciate where you are coming from.

    My point, regardless of what you finally decide is that we all need a steady stream of income and I felt this made these assets more bond like.

    Hell, you're so adept at finding equity like bonds that I can imagine you having a novel approach that works quite well for your retirement needs.

    For the average bee, my sense is retirees get overly weighted to bond-like assets, in part, due to the trade off of locking in a steady stream of income. I personally felt I needed about $50K to meet my monthly bills. Each person needs to run these numbers for their unique situation.

    Anyway, at retirement I felt overly weighted towards what I would call "bond-like assets". Because of this, I need to constantly remind myself to move a little further out on the risk/reward spectrum with my remaining liquid assets.
  • @bee: you might find this article interesting.
    http://news.morningstar.com/articlenet/article.aspx?id=630083

    here's a snippet: "In the camp of factoring Social Security benefits into one's asset allocation plan is Vanguard founder Jack Bogle. When I interviewed him at the Bogleheads conference this past October, he made the point that investors ought to consider Social Security as part of their portfolios' fixed-income weightings. Not only does Social Security deliver income payments in a way that a bond does, but those payments are also adjusted for inflation.
    For those reasons, Bogle believes that Social Security is akin to an inflation-protected bond that pays income for the rest of your life. By extension, he thinks that retirees who are eligible for Social Security can reasonably hold a higher equity weighting than traditional asset allocations would dictate"
  • beebee
    edited July 2014
    heezsafe said:

    @bee
    LT care insurance--- what funds that?
    You can get a lot more, for a lot less, right now.

    Not a chance...I'm self insured.

    My gravestone will read, "I told you I was sick!" (Reference Key West, FL)
  • @Junkster: regarding, "Is there anything wrong with drawing down *some* principal in retirement if necessary?"......"Some might say enjoy the $1,687,500 pursuing our passions in retirement because we earned it. And not to fret endlessly about preserving it all with 4% or whatever returns"

    There's an excellent book titled Die Broke, by S. Pollan. I read it when it first came out. I think you can now purchase it for one cent used on amazon.com

    There are definitely going to be some retirees who are going to want to spend down the principal of their portfolios and "die broke". As you said, "we earned it." Unless there is some overarching desire to pass that portfolio on to one's heirs, it's a perfectly legitimate way.

    image
  • That's what I plan on doing. Finding myself/wife and a nice little 55+ community on the beach somewhere in Florida and watching the sun go down each day.
  • I will qualify for a pension and SS as will the wife. I always wondered if the age in bonds included these benefits or out in our overall allocation. I would guess Bee is correct. Great post

    Guido
  • Dex
    edited July 2014
    bee said:



    Your thoughts?

    The way you present the numbers is a bit confusing to me.
    Isn't the formula this?

    $50K total needed
    -$XX Net Social Security (after medicare)
    = amount funded by investment savings

    To me that is the reality check.

    I'm single, 60, own my home and RV - no debt and have been retired for going on 8 years - average spending 26.5K

    I'm estimating spending an average of 32.1K/yr from 2015-23

    I'm guessing that net SS will cover about 50% of my spending when I collect it.

    I'm using 4% growth rate for my investments - and I'm not running out.

    Let's say I had $1M to invest and get 4%, spend $40K/year, ignore taxes for now. SS gets a CPI
    So my investments fund my spending, SS offsets inflation.

    And, I still have my home.

    Conceptually you can see it works.


















  • beebee
    edited July 2014
    @ Dex
    I'm single, 60, own my home and RV - no debt and have been retired for going on 8 years - average spending 26.5K

    I'm estimating spending an average of 32.1K/yr from 2015-23


    Using your 4% factor for your $26.5K income if you had to fund it yourself it would require $660,000 using a 4% draw.

    My question was how should we treat this income stream? Should it be considered part of our overall bond allocation? If yes, than how should other retirement assets be invested?

    Regardless the amount saved, most retirees probably consider these retirement assets as very dear and therefore may invest too conservatively.

    My thinking is that a portion of our retirement assets shoud be readily available to provide additional income and for financial emergencies. A second portion should be invested for the medium term (3-7 years) with the idea that much it will be used to provide future medium term income needs. A third portion should be invested for long term growth invested further out on the risk/reward spectrum.




  • bee said:



    My thinking is that a portion of our retirement assets shoud be readily available to provide additional income and for financial emergencies. A second portion should be invested for the medium term (3-7 years) with the idea that much it will be used to provide future medium term income needs. A third portion should be invested for long term growth invested further out on the risk/reward spectrum.


    @Bee
    I agree with the above.
    I would also say that a person should have about 2 years of estimated expenses in cash or near cash.

  • Not sure Ted would agree... I believe that he shoots for about two days.:-)
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