Best Mix Of Stocks And Bonds For Retirement

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Advantages And Disadvantages Of Reits

How to mix stocks and bonds for retirement.

Ultimately, whether interest rates are rising or falling does not seem to be the key driver of REIT performance over medium- and long-term periods. Rather, the more important dynamics to address are the underlying factors that drive rates higher. If interest rates are rising due to strength in the underlying economy and inflationary activity, stronger REIT fundamentals may very well outweigh any negative impact caused by rising rates.

  • Global REIT inflation-adjusted total returns: 6.4%
  • Global stock real returns: 5.5%
  • Non-government bonds: 3.5%
  • Government bonds: 3.1%

Will It Work For Every Investor

Now, its important to point out that the Oracle of Omaha didnt say that the 90/10 split makes sense for every investor. The larger point he was trying to make was about the makeup of portfolios, not the precise allocation. His main contention was that most investors will get better returns through low-cost, low-turnover index funds, an interesting admission for someone whos made a fortune picking individual stocks.

And theres an obvious distinction between Mrs. Buffett and most investors. While we dont know the exact amount of her bequest, one can assume shell get a cushy nest egg. She can likely afford to take on a little more risk and still live comfortably. Still, this 90/10 allocation drew considerable attention from the investing community. But just how well would such a mix of stocks and bonds hold up in the real world?

What Is A 70/30 Portfolio

A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds. Any portfolio can be broken down into different percentages this way, such as 80/20 or 60/40. The ideal allocation will depend on the investor’s age, risk tolerance, and financial goals.

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How Much Should You Save

In addition to an appropriate asset allocation, investors will need to determine how much to save for retirement. This has a substantial impact on your retirement success. Most investors should save at least 15% of their income, which includes company contributions that may be available through a workplace plan such as a 401. If 15% isnt possible right now, start at a lower rate and plan to increase the amount each year.

MSCIMSCI and its affiliates and third-party sources and providers makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast, or prediction. None of the MSCI data are intended to constitute investment advice or a recommendation to make any kind of investment decision and may not be relied on as such.

It is not possible to invest directly in an index.

Important Information

The views contained herein are those of the authors as of June 2022 and are subject to change without notice these views may differ from those of other T. Rowe Price associates.

View investment professional background on FINRA’s BrokerCheck.

202207-2290691

Diversification Has Proven Its Long

Planning for retirement

During the 20082009 bear market, many different types of investments lost value at the same time, but diversification still helped contain overall portfolio losses.

Consider the performance of 3 hypothetical portfolios: a diversified portfolio of 70% stocks, 25% bonds, and 5% short-term investments an all-stock portfolio and an all-cash portfolio. As you can see in the table below,1 a diversified portfolio lost less than an all-stock portfolio in the downturn, and while it trailed in the subsequent recovery, it easily outpaced cash and captured much of the market’s gains. A diversified approach helped to manage risk, while maintaining exposure to market growth.

Diversification helped limit losses and capture gains through the financial crisis and recovery

Past performance is no guarantee of future results.

Why is it so important to have a risk level you can live with? The value of a diversified portfolio usually manifests itself over time. Unfortunately, many investors struggle to fully realize the benefits of their investment strategy because in buoyant markets, people tend to chase performance and purchase higher-risk investments and in a market downturn, they tend to flock to lower-risk investment options behaviors which can lead to missed opportunities. The degree of underperformance by individual investors has often been the worst during bear markets.

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Comparing Stocks & Bonds For Retirement: Balancing Allocation

Many people assume that stocks are riskier compared to bonds. Should this be true, you will have mutual funds in a bond-oriented portfolio, which will be less risky than a stock-oriented portfolio.

Understanding the Ideal Asset Allocation

Many investors getting ready for retirement are keen on knowing the portion of their portfolio will be invested in bonds and stocks. They also want to know the right mix of such assets to qualify for growth or income from such a portfolio. Whatever your aim in retirement is: growth or income, your asset allocation should correlate as it is primal to the success of such a goal.

For a lot of investment managers, they prefer strategies where age majorly determines the recommendation of allocation. In the long term, however, this might not be helpful. As an example, the life expectancy for every 60 years senior is not the same. You might want to leave a legacy to your descendant or direct all your funds to retirement. Such are personal factors that one might overlook in asset allocation for a traditional setting.

Reasons Bonds Might be Saved.

Investors, most of the time, believe a large portion of their portfolio should go to bonds for many reasons. They assume:

Low Returns might bring down the duration that your portfolio will provide during your investment time.

The rise in medical tech has also increased the average investor time, triggering a corresponding growth increase to meet long-term goals.

Inverse Relationship from Bond

Go For Variety Not Quantity

Having a lot of investments does not make you diversified. To be diversified, you need to have lots of different kinds of investments. That means you should have some of all of the following: stocks, bonds, real estate funds, international securities, and cash.

Investments in each of these different asset categories do different things for you.

  • Stocks help your portfolio grow.
  • Bonds bring in income.
  • Real estate provides both a hedge against inflation and low “correlation” to stocksin other words, it may rise when stocks fall.
  • International investments provide growth and help maintain buying power in an increasing globalized world.
  • Cash gives you and your portfolio security and stability.

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Whats The Right Mix Of Stocks And Bonds

https://money.com/collection-post/stock-and-bond-mix-needed-for-retirement-saving/

That depends on several factors, including how comfortable you are with risk and most significantly how long it will be until you plan to retire and start pulling money from your nest egg.

When you’re young the long-term growth potential of stocks outweighs their long-term risks, so your retirement assets should be concentrated in stocks, not bonds.

As you get older and closer to retirement, it makes sense to sacrifice some of that potential for stability. After all, you want to be sure that money is available when you need it. So over time you should decrease the percentage of your assets invested in stocks and increase the percentage in bonds.

But whats the right stock/bond breakdown for you? The old rule of thumb was to subtract your age from 100 and invest that percentage in stocks and the rest in bonds.

However, with Americans living longer lives many financial planners now recommend 110 or even 120 minus your age.

What To Do If You Have An Annuity

Investing 101: Stocks, Bonds, 401K, Cash, Portfolios, Asset Allocation, Etc.

Many retirees use annuities to provide a steady paycheck that they won’t outlive, and to help protect part of their portfolios from market risk. If you have predictable income from any type of annuity, you may be comfortable reducing the balance in your cash account and short-term reserve, as well as investing the rest of your portfolio in stocks and bonds for growth potential.

With this in mind, consider lowering the amount you set aside in cash and the short-term reserve by the income, if any, generated from an annuity. The annuity income can be seen as a baseline of income, in addition to Social Security and other sources, before you withdraw from your portfolio.

Annuity guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.

Many retirees use annuities to provide a steady paycheck that they won’t outlive, and to help protect part of their portfolios from market risk. If you have predictable income from any type of annuity, you may be comfortable reducing the balance in your cash account and short-term reserve, as well as investing the rest of your portfolio in stocks and bonds for growth potential.

With this in mind, consider lowering the amount you set aside in cash and the short-term reserve by the income, if any, generated from an annuity. The annuity income can be seen as a baseline of income, in addition to Social Security and other sources, before you withdraw from your portfolio.

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Retirement: 70s And 80s

  • Stocks: 30% to 50%
  • Bonds: 50% to 70%

You’re likely retired by nowor will be very soonso it’s time to shift your focus from growth to income. Still, that doesn’t mean you want to cash out all your stocks. Focus on stocks that provide dividend income and add to your bond holdings.

At this stage, you’ll probably collect Social Security retirement benefits, a company pension , and in the year you turn 72, you’ll probably start taking required minimum distributions from your retirement accounts.

Make sure you take those RMDs on timethere’s a 50% penalty on any amount that you should have withdrawn but didn’t. If you have a Roth IRA, you don’t have to take RMDs, so you can leave the account to grow for your heirs if you don’t need the money.

Should you still be working, by the way, you won’t owe RMDs on the 401 you have at the company where you’re employed. And you can still contribute to an IRA if you have eligible earned income that doesn’t exceed the IRS income thresholds.

Which Asset Allocation Do I Choose

Before we decide which portfolio to choose, its important that youunderstand HOW to choose. First, letslook at our options.

In the chart below Ive plotted asset allocations from the same data as in the first example. From left to right you see the following allocations: 10/90, 20/80, 30/70, 40/60, 50/50, 60/40, 70/30, 80/20, and 90/10.

Notice the relationship between risk standard deviation, and return.As the average return increases, so does the risk. Your asset allocation choice is based on this tradeoff.

So, which one do you choose? You choose the portfolio that gives you the ideal balance between risk and return. Could I be more vague? Probably, but Id have to try real hard.

Ill provide more guidance in a moment after this section on Modern Portfolio Theory.

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Hedging Against The Risk Of A Permanent Decline In Stock Value

There is another factor to consider. The data in Table 1 comes from the past. Physicians in the evidence-based medicine era are all quite familiar with the limitations of retrospective data. The future does not necessarily have to resemble the past. The real risk of stocks is not that they will decline in value temporarily, but that they will decline in value permanently. While that risk is likely fairly low, its not zero. Owning some less risky assets in the portfolio is a good way to hedge against that unlikely possibility.

In addition, many investment authorities expect future returns, at least for the next decade, to be lower than the historical averages due to low interest rates and high stock valuations. While my crystal ball is cloudy about what the future holds for stock market returns or interest rates, its important to realize that if your retirement plan relies on your achieving historical rates of return to succeed, it may not be as robust of a plan as you think. You may need to save more, work longer, or even take more risk with your investments than you would like, knowing that the risk of running out of money in old age may be worse than the risk of losing money in the markets.

Combining Return And Risk

The best thing you can do now for your portfolio

Before we start looking at this in a little more detail, I want to point out that what we have just done is frame the investment decision. When you look at investing through the lens of asset allocation and index funds, you choose portfolios based on their combination of risk and return not whimsical guesses or fun and excited stories.

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Which Bonds To Choose

However, some bonds and bond funds are safer than others.

Retirees should aim to hold only high-quality bonds, advisors said. That means generally avoiding junk bonds and choosing those of investment-grade caliber, advisors said.

That’s because junk bonds often move in tandem with stocks. They’re issued by companies or governments at higher risk of defaulting on their debt and incapable of repaying investors during a recession or if the stock market tumbles, advisors said.

Retirees who want exposure to junk bonds should use money earmarked for stocks and not bonds, Benz said.

One general approach to bond investing is to allocate a third of the bond portfolio to each of three categories: U.S. Treasury bonds, corporate bonds and mortgage-backed securities, according to Charles Fitzgerald, CFP and principal at Moisand Fitzgerald Tamayo.

Allocating to municipal bonds may also make sense, especially for high-income retirees with a taxable brokerage account, given their tax advantages, Fitzgerald said.

But retirees are better off buying investment-grade bonds, which are issued by entities with a high credit rating, he said. For example, Standard & Poor’s investment-grade ratings include AAA, AA, A, and BBB.

Aside from bond type and credit quality, retirees should also consider duration when buying a bond fund, Fitzgerald said. That refers to the average time it takes for the fund’s bond holdings to mature .

Life Insurance As Retirement Income

Life insurance is meant to provide financially in the event of death, but its also commonly sold as a way to accumulate assets for retirement.

The strategy for life insurance is to purchase a whole life policy and pay the premiums while you work so the cash value grows tax-free. Then, in retirement, you can borrow from the cash value as a tax-free loan to yourself.

But there are many problems with life insurance as a retirement investment.

The main problem with this strategy is low return.The cash value of a life insurance policy is invested inyou guessed itcash . Cash isnt a great long-term investment because it often loses money after inflation. You also have the added insurance expenses, further reducing your return.

If youre approaching retirement and you already have a whole life policy, then the first question is whether or not you need the death benefit. Usually those approaching retirement have enough assets to be self-insured, so theres no need to maintain the policy. The insurance has served its purpose.

If you dont need the death benefit anymore, cashing out the policy and investing the proceeds into your diversified portfolio is usually better.

If you dont have a whole life policy and youre looking to build wealth for retirement, you should look at other solutions first.

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Is There A Standard Formula

There is no one-size-fits-all asset allocation. One 55-year-old pre-retiree might be more risk-averse than another. A 60-year-old who plans to work another five years may need less cash than a peer who is retiring next month and will soon start taking distributions from their portfolio. Your ideal allocation is the one thats tailored to you.As a guide, the traditionally recommended allocation has long been 60% stocks and 40% bonds. However, with todays low return on bonds, some financial professionals suggest a new standard: 75% stocks and 25% bonds. But financial planner Mari acknowledges that can be more risk than many investors are prepared to take. If investors have too much exposure to stocks, they may be more likely to sell them at an inopportune time when shares plunge, she points out.

One guideline suggests that your stock allocation should equal 120 minus your age. For example, a 60-year-olds portfolio would consist of 60% stocks .

Source: Stock Allocation Rules. Investopedia, July 11, 2022.

Almost Retirement: Your 50s And 60s

Investing Basics: Bonds

Sample Asset Allocation:

  • Stocks: 50% to 60%
  • Bonds: 40% to 50%

Since youre getting closer to retirement age, now is not the time to lose focus. If you spent your younger years putting money in the latest hot stocks, you need to be more conservative the closer you get to actually needing your retirement savings.

Switching some of your investments to more stable, low-earning funds like bonds and money markets can be a good choice if you dont want to risk having all your money on the table. Now is also the time to take note of what you have and start thinking about when might be a good time for you to actually retire. Getting professional advice can be a good step to feeling secure in choosing the right time to walk away.

Another approach is to play catch-up by socking more money away. The IRS allows people approaching retirement to put more of their income into investment accounts. Workers who are 50 and older can contribute an additional $6,500 per year to a 401called a catch-up contributionfor 2021 and 2022. In other words, those aged 50 and over can add a total of $26,000 to their 401 or in 2021 . If you have a traditional or Roth IRA, the 2021 and 2022 contribution limit is $7,000 if you’re aged 50 or older.

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