Efficient Retirement Income without Bonds?

A researcher (Ph.D. in Economics) with the National Graduate Institute for Policy Studies has recently published a provocative paper on how to most efficiently produce retirement income. A somewhat radical conclusion is that for a 65 year old married couple using a 4% withdrawal rate to meet retirement spending needs, bonds (or bond funds) should not be part of their retirement portfolio.

Instead, according to the research, a preferred retirement portfolio should consist only of stocks (or stock funds) and fixed single-premium immediate annuities (SPIAs). Conversely, based on current product pricing levels, the retired couple does not need an inflation-adjusted fixed/immediate annuity or a variable annuity with a guaranteed living benefit rider.

The research involved analysis of 1001 different asset allocation scenarios for a 65-year old couple who wants a minimum lifestyle based on a spending goal of 6% of the value of their assets on the date that they retire. The analysis further assumed that this couple had combined Social Security benefits equal to 2% of their retirement date assets. Therefore, they need to generate additional income from their nest egg equal to 4% of their retirement date assets.

The various outcomes are plotted as a percentage of retirement income needs that are met (in the 10th percentile outcome) against the percentage of retirement assets that remain at death (median outcome).

Looking at the graph of outcomes, it appears that the sweet spot is in an allocation range near 60% stocks and 40% SPIAs.

You may be wondering why inflation-adjusted SPIAs would not work better. The answer seems to be that they are overpriced relative to SPIAs that are not inflation adjusted. That is one excellent aspect of this research: It is based on current pricing levels for various investments. The other is that stock market returns used in the analysis reflect current conditions, not market performance from years past that we are unlikely to see again in baby boomer lifetimes.

The paper and related content are definitely worth reading because of the educational value. Even if you use a fee-based planner to advise you, this article should be discussed with your adviser to be sure that all of the best and most current research is being used to create your financial plan.

Here is the link to the full article.  However, the reading is heavy so you can probably learn more, faster by reading the author’s first blog post and second blog post about the article , including the excellent comments to both. Then head over to the thread about the article at the Bogleheads forum.

I am definitely going to study this topic more, including the suggestion in one of the comments that the SPIA component can be fulfilled by a use of a bond ladder (not a bond fund).

Your thoughts?


  1. Eugene Gaudreault says

    Thank you for providing a forum to discuss Retirement Issues.

    I am wondering if many of your readers are in a situation similar to mine. I left a company many years before retirement age. The amount of my pension was much less than the amount for others with equal years of service, if they stayed with the company until retirement. Equitably and in theory, both amounts should be comparable, but usually are not.

    I feel that the amount offered to me from my pension plan is not equitable and would like the amount to be made equitable.

    I worked for a large company for about 17.5 years. I left that company in 1979 at about 40 years old. 25 years later in 2004, at age 65, I was due to receive my pension. The pension was of the “Defined Benefit” type.

    I was informed that the pension amount was $238.53 per month. That amount was based on wages earned up to 1979. If a person with equivalent position and service retired in 2004, the pension amount would be much more. This is so because there was inflation in wages from 1979 to 2004 of 2.67 times. That inflation would result in higher wages and would calculate to a pension of $636.88 per month. This is a significant difference. It seems that I should receive an amount of at least $636.88 per month.

    The pension from July 15, 2004 to January 15, 2013 should amount to 102 Months (8.5 years) at $238.53 per Month = $24,330.06. At $636.88 per month, the amount would be $64,961.76, a difference of $40,631.70 at this point in time.

    Another way to look at this is that the pension fund kept the interest on the pension value that I earned. A growth of 2.67 times in 25 years is equivalent to an interest rate of only 4%, a minimal amount.

    This is not an issue of finances; this is an issue of equity. Others are receiving a reasonable pension. Why is my pension not equivalent to the others? The pension was part of my compensation. It seems that the company Directors failed their fiduciary duty to “Maintain the Value” of my pension.

    I would appreciate hearing from your readers in this situation.

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