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.
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).
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