Knowing how to start planning for your retirement is a serious issue. 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’ll probably need to generate income from your investments. That’s true for some people. OK. I’m not going to argue that.
But the post goes on to suggest that folks need to invest in 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.)
This piece left out one of the best investments for retirement – 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.
You have to consider your investment time horizon before you make an investment decision. Often, that has little to do with reaching life’s milestones – like retiring.
When you retire, what you should be most concerned with is 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. Even a motley fool should understand that…
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 retirement.
Of course, if you did shift all your money into fixed income investments, you wouldn’t be alone. After all, we just finished one of the worst decades ever for equity investors. It’s been a terrible 10 years. On top of that, some geniuses are telling everyone to move assets into fixed income when they retire.
But 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 The first shows that had you invested 75% of your money in equities and 25% in bonds and withdrawn (inflation adjusted) 5% for 30 years, you would have succeeded 98% of the time.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.
On the other hand, had you invested all your money in bonds like the Fools of Motley encourage you to do, 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. I’m not sure if the folks at Motley Fool have enough room in their mansions for everyone who follows their advice.
Do stocks always beat bonds? They certainly do not.
I don’t care if you’re talking about an American Pension Plan, a Canada Pension Plan (CPP) or whatever plan applies to your geographic location.
Sometimes, as you already know, stocks can do really nasty things for a very long time. In fact, we just finished 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 one which must be addressed.
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?