Is investing in stock/bond funds in retirement too risky? (retired, friends)

[Excellent Point]

Many of my friends who are either near or in retirement are bailing out of stock and bond funds and into cash. They say the 4% (semi) rule is too risky and so is the now informal 2-3% rule.

I tell them that if you would have retired thirty years ago and pulled out 8% a year plus inflation increases- averaging 3%- and had a 60-40 (stock-bond) portfolio, you would still have money left after 30 years of retirement. (even at 8%!) So using the 4% rule in the last 30 years would be very conservative.

They say just because something was successful in the past means absolutely nothing today and into the future. Today is different than the past. So they are putting 95% of their money in 10 Year CD's paying 2.25% and hoping for the best in retirement.

[oldsoldier1976]

Originally Posted by Excellent Point

Many of my friends who are either near or in retirement are bailing out of stock and bond funds and into cash. They say the 4% (semi) rule is too risky and so is the now informal 2-3% rule.

I tell them that if you would have retired thirty years ago and pulled out 8% a year plus inflation increases- averaging 3%- and had a 60-40 (stock-bond) portfolio, you would still have money left after 30 years of retirement. (even at 8%!) So using the 4% rule in the last 30 years would be very conservative.

They say just because something was successful in the past means absolutely nothing today and into the future. Today is different than the past. So they are putting 95% of their money in 10 Year CD's paying 2.25% and hoping for the best in retirement.

They are right. You are not. you would have had to have had some absolutely stunning returns.

[hikernut]

You'll find probably hundreds of discussion of this question here, plus thousands more if you do a web search.


The past 30 years are not a good benchmark, as it will give you a much higher safe withdrawal rate than some other periods. Historically speaking, 4% is conservative in most cases, but has put you right on the edge for the worst 30-year runs.


Zero money in stocks is not a good plan, except for the person who will just sell them after they drop in price. All IMO, of course.

[mathjak107]

a safe withdrawal rate is based on what it would take to get through the worst time frames a retiree would have seen . anything better is a plus .

specifically the worst starting year's for a retiree to have chosen was 1907,1929,1937,1965,1966 with 1965/1966 the absolute worst . we have seen nothing worse for any retiree group in more than 50 years now .

we had 116 30 year cycles so far . 90% of the cycles drawing 4% inflation adjusted left you with more than you started . 67% of the time it left you with 2x what you started and 50% of the time it left you with 3x what you started .

so that gives you an idea of what the safe withdrawal rate is based on and how conservative it is .

it takes at least 35% -40% in equity to get a high enough success rate over 30 years at 4% . today safe withdrawal rates can be calculated for longer retirements and with lots of allocations to stocks and bonds.

zero equities and using only fixed income to generate your income over 30 years failed at trying to draw the same 4% , 62% of all 116 time frames . that is as risky a bet as you can make .

you had to cut it down to 25 years at only a 3% draw to see at least a 90% success rate . planning out to 25 years can be risky if you are 62 ,so more than likely about a 2-1/2 % draw inflation adjusted is about as good as it gets for fixed income only .

that is like taking almosrt a 50% pay cut for not using at least 35% equities .

taking raises along the way when using a constant spending 4% is important or to many dollars may be left not enjoyed and could have been .

[rational1]

> Today is different than the past.

Absolutely. But exactly HOW is it different? Not sure I know.

> So they are putting 95% of their money in 10 Year CD's paying 2.25% and hoping for the best in retirement.

I think there is good reason for having some $ in bonds. Not all, and certainly not all long bonds. I don't expect much inflation over the next few years but 10 years...I'm not willing to make that bet.

As a recent retiree (with some significant amount in stocks) I think your "friends" are excessively paranoid. One step away from putting it all into gold and buying more guns.

Beyond diversification, the best approach, in my opinion, is to arrange things so your fixed costs are not that high. This maximizes flexibility in your withdrawal rate.

[mathjak107]

this time is different ------- that expression has been the most costliest words in the english language .

i can tell you this - i retired almost 3 years ago . we have been drawing 100k a year in income from our portfolio while delaying ss .

as of this week we are at the highest balance ever ,and that is after 3 years spending .

current year is in cash .

money for eating in years 2-6 are in an income oriented portfolio 77% bonds 23% dividend income fund . 75% less volatile than the s&P 500

money for eating in years 7-11 is in a 60/40 growth and income model .

money for eating in 12 to 30 years is all in a 100% equity growth model

[mathjak107]

Originally Posted by rational1

> Today is different than the past.

Beyond diversification, the best approach, in my opinion, is to arrange things so your fixed costs are not that high. This maximizes flexibility in your withdrawal rate.

you need both the income growth and to cut costs . they are very different .

for a while they look the same but cutting costs has a bottom . after you have nothing left to cut and expenses rise you need more income too .