As millions of baby boomers are either retiring or nearing retirement, there is an ongoing debate on how to manage one’s portfolio heading into and once in retirement. Here’s a glimpse into it: While at last week’s Morningstar Investment Conference, I tweeted a comment made by Morningstar’s David Blanchett about the likelihood of success for a 50% stock/50% bond allocation with a 4% inflation-adjusted withdrawal rate (the so-called 4% rule) in the current low-rate market environment. David described the odds of success as being no better than a coin toss. (Success being defined, in this context, as not outliving one’s savings.) Moshe Milevsky quickly responded by tweeting “Hopefully somebody asks him whether ‘probability of success’ or failure is a proper risk metric.”
While it can be hard to judge emotions from written words, especially a tweet, neither David nor I thought Moshe was trying to be cheeky. Rather, Moshe’s comment was reflective of the different camps or—if you prefer—schools of thought about how investors should allocate their portfolios in retirement. (Both David and Moshe have published research about retirement portfolios.) One camp calls for maintaining an allocation to stocks with systematic withdrawals (e.g., the 4% rule). The other camp calls for annuitizing an amount large enough to cover anticipated living expenses.
The systematic withdrawal camp focuses on using the portfolio to fund consumption. They suggest withdrawing a small amount from your portfolio in the first year of retirement (e.g., 4% of total retirement savings) and then increasing it each year in accordance with inflation. The actual amount that can be safely withdrawn depends on assumptions about future market returns, how big or small of an equity allocation is used and the existence of other forms of income (e.g., a pension). This can be thought of as more of a growth approach, especially since if the portfolio does well, the amount available for withdrawals will increase.
More on AAII.com
- Retirement Planning: Focus First on Covering Fixed Expenses – Michael Falk explains why the first goal of retirees should be ensuring all fixed expenses are covered.
- Finding the Right Withdrawal Rate: One Key to Portfolio Sustainability – Former AAII Journal editor Maria Crawford Scott described how to use systematic withdrawals to provide necessary income.
- Simple Steps to Overcome Information Overload – If all the guidance about how to invest has your head spinning, this new AAII Blog post by our president, John Bajkowski, should
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Highlights from the AAII Journal
- Uses and Misuses of Ben Graham-Style Investing – Buying deep value companies can yield big rewards, but the ability to cope with short-term discomfort and a willingness to diversify is required.
- Graham Stocks with a Low Price Relative to Net Current Assets – This month’s First Cut column highlights 25 stocks trading at cheap valuations.
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Optimism fell to 22.0%, a four-week low. Since the start of this year, bullish sentiment has only exceeded 30% seven times. More about this week’s results.
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The Week Ahead
Results from the second quarter’s early reporters will continue to be released, with 10 members of the S&P 500 on the calendar. They are NIKE (NKE) on Tuesday; Acuity Brands (AYI), General Mills (GIS) and Monsanto (MON) on Wednesday; and ConAgra Foods (CAG), Constellation Brands (STZ), Darden Restaurants (DRI), McCormick & Co. (MKC), Micron Technology (MU) and Paychex (PAYX) on Thursday.
The week’s first economic report will be April international trade, which will be released on Monday. Tuesday will feature the second revision to first quarter GDP, the April Case-Shiller Home Price Index and June consumer confidence. May personal income and May pending home sales will be released on Wednesday. Thursday will feature the June Chicago Purchasing Managers’ Index (PMI). Finally, June motor vehicle sales, the June PMI Manufacturing Index, the June ISM Manufacturing Index and May construction spending will be released on Friday.
Three Federal Reserve officials will make public appearances this week: Chair Janet Yellen on Wednesday, St. Louis president James Bullard on Thursday and Cleveland president Loretta Mester on Friday.
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