Your Money ; Financially Speaking
How to set up a retirement-investment plan that pays the bills
The Great Stock vs. Bond Debate By Jane Bryant Quinn
I have a radical thought. How about not invest- ing for growth in the years just before retire- ment, and even after? Instead, think about
investing in ways that make sure you can pay your
bills. That means putting more money into fixed
income assets and less into stocks.
That’s not the usual advice. A majority of us
retiring now (or soon) will live well into our
80s. Many will nudge the 100-year mark. Over
so long a period, stocks are likely to rise substantially. That’s why you’re usually told to keep your
stock allocation high at age 55 or 65—say, half of
your retirement savings (or more), with the rest
in bonds. If all goes well, you’ll wind up with a
larger nest egg. The money should last for life if
you spend no more than 4 percent of the total
in your first retirement year, plus an increase to
cover inflation in each following year.
But, but, but … what if you were 50 percent in
stocks and retired in January 2000 just before
the market crash? Or retired in 2008 when the
economy almost went down the drain? The 4
percent withdrawal rule still might work, if
you’re highly disciplined. Still, it’s iffy. And let’s
face it—you might have sold during the price
plunge, to preserve what you had left. That’s
kissing the growth you’d hoped for goodbye.
You’re most likely to cut and run if you depend
on your savings to cover the monthly bills. For
that reason, an increasing number of financial
advisers think your first priority should be creating a steady income. For example, you might
arrange for monthly withdrawals from a mix
of mutual funds invested in bonds. Later, you’d
add immediate-pay annuities. Top it off with a
smaller layer of stocks, for future income growth.
You should start your move toward bond funds
five years before your retirement date, says Jeff
Maggioncalda, president and CEO of Financial
Engines, which manages 401(k) accounts for
corporate employees. FE’s new Income+ program works with just 20 percent in stocks.
Josh Cohen of Russell Investments thinks you should
hold about 30 percent in
stocks when you retire, with
the rest in diversified bonds.
Follow the 4 percent rule on
withdrawals. That gives you
the same annual income you’d
get from a more aggressive
fund but with less risk, he says.
Zvi Bodie, professor at Boston University School of Management and author of Worry-Free Investing, plumps for holding
the bulk of your money in Treasury inflation-protected securities—again, with a small amount
in diversified U.S. and international stocks.
Target-date mutual funds split your money
between stocks and bonds in a way the managers think is appropriate to your age. They
usually follow the traditional path—about 50
percent in stocks on your retirement date.
One example would be Vanguard’s Target
Retirement 2020 Fund, suggested for people
around 55 today. It currently holds 66 percent
of your money in stocks—a reasonable amount if
you’re in good health and have substantial assets
and a job that’s reasonably secure. It also helps
if you won’t be making withdrawals until you’re
in your 70s—giving stocks even longer to grow.
But what if you have only modest savings, a lot
of debt, and will have to start living on your nest
egg as soon as your paycheck stops? You can’t
afford the risk that the market will fall.
Jane Bryant Quinn is a personal finance expert
and author of Making the Most of Your Money
NOW. She writes regularly for the Bulletin.