Planning for Your Retirement the Smart Way

by Neal Frankle, CFP ®

This post was originally published in December 2009 – about the same time most main stream publications were advocating staying out of stocks for good. 

Planning for your retirement is serious business. That’s why I get so angry when misinformation gets floated around. I recently read on a blog that if you retire now or want to do so shortly, you should buy CDs, bonds or preferred stocks, or take an annuity payout in order to create that income.

I don’t have a big problem with these investments. But they sure aren’t the smartest or only way to create retirement income if you are planning on living for 10 years or longer after you retire. (More on that in a bit.)

Indeed, one of the best investments for income during your retirement is equities.

Should you put all your money in equities all the time? I don’t think so. But you shouldn’t ignore these investments or shy away from them just because you’ve reached a certain age.

This might sound crazy but your age has almost nothing to do with how you should invest.  Your investment time horizon is much more important.  That’s what you need to think about before you make an investment decision. Often, that has little to do with reaching life’s milestones – like retiring.

When you retire, you should be most concerned about how long and how much you can withdraw from your nest egg…right?  Say you retire at age 65. How long are you going to live?  Statistically, you’ve got a good 25 years to go. That means your investments have got to keep working another 25 years…right? Simple.

But if you shift most of your money into bonds right when you retire, you may not make enough money to last the rest of your life.  Of course, if you did shift all your money into fixed income investments, you wouldn’t be alone. But that doesn’t mean it’s the best way to go.

Take a look at the chart below.

It shows how long you could make inflation-adjusted withdrawals from your account before running out of money.

I’ve highlighted two examples. The first shows that had you invested 75% of your money in equities and 25% in bonds and withdrawn (inflation adjusted) 5% for 30 years, you would have succeeded 98% of the time. Meaning had you done this you would have run out of money before you ran out of life only 2% of the time. ( Of course the past is no guarantee of future results.)

On the other hand, had you invested all your money in bonds, you’d be able to stay retired only 20% of the time. The other 80% of the time, you’d go back to work or move in with the kids.

Do stocks always beat bonds? They certainly do not.  Sometimes, as you already know, stocks can do really nasty things for a very long time. In fact, 2000 through 2010 was a particularly difficult decade with stocks showing no return.

I am simply saying that to ignore an asset class that is probably the most important asset tool at your disposal to create retirement income is a huge oversight and mistake.

What say you? Should people who retire put more money into bonds and fixed income? Did you do that when you retired? Or are you planning on doing so?

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