Planning for Retirement: How to Allocate Your Stocks/Bonds/Cash

by: Roger Nusbaum

A reader left a question asking for particulars about his stocks/bonds/cash allocation. He gave some details about his situation. Sounds like he has a good idea about when they will retire with the expectation of a little bit of income from outside the portfolio.

I don't know this person. Giving advice to or taking advice from a total stranger is a bad idea all the way around, so I am going to punt on narrow advice and stick to some generalities.

This reader thinks he needs more fixed income - maybe you wonder the same thing about your portfolio.

There is a simple mathematical argument for 100% equities. The odds that equities will outperform bonds over the next 15 years is something like 92%. Stocks generally go up in price and grow their dividends. If you buy a bond of any maturity today, you will receive 100 cents on the dollar when it matures. $100,000 into a bond today gets you $100,000 ten years from now (or whatever maturity you buy). In 2017 $100,000 will buy a lot less than it does today, as you know.

Chances are, your emotional well being doesn't care at all about the above mathematical argument.

Part of the answer to how much in bonds, aside from any emotional aspect, is simple dollars and cents. The reader has $1.5 million now. If the income needed from the portfolio is $35,000, then $1.5 million seems like a lot. If the income needed from the portfolio is $110,000 then $1.5 million doesn't look so great.

I tend to think planning for retirement has to include a plan for spending. Maybe it breaks down to necessities, fun and the unexpected. Someone left a comment a while back saying this type of spending plan is similar to Ray Lucia's bucket idea. I haven't read his books, but I make no claim of originality.

My view on taking income from a portfolio is that a person needs the portfolio to create a certain number. If that number is reasonable, 5% or less, then the mix (assuming something close to normal) can be more about tolerances than numbers. Even a 60/40 mix will give a good chance of providing enough growth.

Even then, the equity portion can be constructed in such a way to reduce the likelihood of big blowups within.

A big issue that you really need to dig into if you are managing your own is how long your money needs to keep growing. Someone who is 60 or 65 who has just retired and whose parents are alive needs to plan for many years of growth. Twenty years from now, this person's expenses might be close to double (3% inflation means prices double in 24 years) what they are now. At that point, this person in question here will likely still have plenty of more time yet.

To sum up, I doubt that less growth is going to be the best path too often.