In retirement: how much bonds and stocks?

Most people cling to the idea that people should invest in stocks when young and bonds when old.  

Specifically, many believe that young people can stand the risk of stocks and retirees can’t, so you should start 100% stocks when young and gradually increase your bond percentage until you have 100% bonds late in retirement.  Sound familiar?

This advice tends to sound like:

  • own 100% stocks when you are 25
  • 80% stocks and 20% bonds when you are 35
  • 70%/30% at 45
  • 60%/40% at 55
  • 50%/50% at 65
  • 40%/60% at 75
  • 20%/80% at 85
  • 100% bonds in your 90’s

Some provocative research indicates this may be the wrong way to think about asset allocation.  

The riskiest period for retirees is right before and early in retirement.  If they own a bunch of bonds or stocks that tank in that critical time period, it is hard for them to recover.

Added to this, as a retiree ages, their greatest risk is running out of money because their assets don’t appreciate enough relative to inflation or how long they live.

Instead, the new approach indicates a U-shaped path, with lots of stocks early and late, and more bonds in the middle.  The idea is that you get lots of growth early, less right before and early in retirement, and then ratchet up the stocks to make sure you outrun your age and inflation.

Although I think that is better advice than just increasing bond holdings linearly over time, I think it may miss the risk of stocks and bonds at certain times.

Bonds had a lousy year last year, and stocks did wonderfully.  The extremely low rates on bonds should have been a warning, but many people think bonds are inherently safe and don’t understand that bonds decline in price when interest rates rise.

Same with stocks.  Stocks are better investments when they are cheap than when they are expensive.  Knowing when to own one versus the other may mean the difference between collecting cans or enjoying retirement.

Having the right mix of assets before and during retirement is vital to successfully navigating retirement.  The task shouldn’t be taken lightly or with imprecise rules of thumb that don’t always work.

Fortune favor the prepared mind.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

In retirement: how much bonds and stocks?