Is 90% in Stocks Too Much During Retirement?

A reader asks:

    • I’m 61 and have been retired for 2 years
    • No debt or liabilities (my children have completed university)
    • My portfolio is 90% equity, 10% fixed income and the stocks are broadly diversified as well as my retirement accounts (Roth, taxable, 401k, HSA, etc.)
    • I was 100% equity until nearing retirement. I never sold equities during bear markets, nor altered my diversification approach other than to rebalance. Granted, having wages helped me psychologically handle the downturns. I think I can weather those w/o wages, but I’m not 100% convinced.
    • I have a small annuity that currently covers about 30% of my yearly expenses. It is not indexed for inflation.
    • The dividends, interest, and capital gain distributions cover more than the other 70% of my yearly expenditures
    • My yearly expenditures are about 1% of my portfolio value, but my expenditures are covered by the income listed above (i.e. I am not withdrawing assets, I am actually adding to them very modestly).
    • I plan to increase my expenditures, so let’s say I now spend all of the income and take 1% from my portfolio to spend (i.e. I doubled my yearly expenditures).
    • I will take Social Security at age 70, and it will be pretty much at the max level and I’ll spend that too.

My friends and “no-fee financial planner” advise me that I am too aggressively invested and that I should have more bond exposure. “You have won the game, why take the risk at this point?” They seem totally bought into a 60/40 portfolio. I don’t see it that way. At my current spending level, I don’t use any of my portfolio. Doubling my expenditures, I would still have 10 years worth of income I can pull from the fixed income assets alone, and then Social Security kicks in. 

What would you advise someone in my financial situation to do in regard to bond exposure? I feel I have enough.

Thanks, Billy

I love how much information people share with me in these emails. This is great.

First things, first and repeat after me — there is no such thing as a perfect portfolio.

Portfolio construction boils down to your time horizon along with your willingness, need and ability to take risk.

Your age and stage in life are certainly important but so are your circumstances.

For example, an old colleague of mine helped run the family office of a billionaire who kept the bulk of his portfolio in bonds. He had the ability to take loads of risk. But he didn’t need to take risk nor did he want to take risk, so he played it safe.

This is an extreme example where it didn’t really matter what they did with their money but you get the idea.

Billy is in a pretty good place financially. No debt. An annuity that provides regular income. He’s allowing his Social Security payment to grow by waiting until the maximum retirement age. And he’s only drawing down 1% of his portfolio each year.

Setting aside any inflation baked into his financial plan, that’s 10 years’ worth of expenses in the safety of bonds. That’s not bad.

The biggest risk here is obviously a prolonged bear market where stocks take a drubbing and don’t come back for a number of years. The last thing you want to do is sell your stocks when they’re getting crushed during retirement.

The good news with a stock-heavy portfolio that you are relying on for an income component is dividends are far more stable than the stock market itself. Plus dividends tend to grow above the rate of inflation over time.

Last year I wrote the following:

Even during the Great Depression when the stock market fell more than 80% on a real basis, dividends fell “only” 47% or so. Dividends snapped back much quicker than the market after that period as well (it nearly round-tripped before stocks fell an additional 50% in 1937-1938).

Dividends fell just over 20% in the nasty 1973-1974 bear market that witnessed stocks fall more than 50% real.

Real corporate payouts fell just 12% when the stock market got cut in half from 2000-2002 while the Great Recession saw dividends fall 25% when the market fell well over 50%.

Dividends have grown at an annual rate of 5% over the last 100 years or so, outpacing the inflation rate of 3%. That’s a pretty good inflation hedge.

Assuming your 10% bond allocation, dividends, annuity and (eventually) Social Security can cover most of your annual expenses, there are two main risk factors at play with a stock-heavy portfolio in retirement:

(1) Emotional Risk. One of the best ways to predict the future behavior of investors is to look at past behavior. It sounds like Billy has handled volatility well in the past. But that was when he was still saving and had more time to wait out a market crash. Panic-selling during retirement could really set you back because you don’t have as much time to allow compounding to make up for your mistakes.

(2) Financial Planning Risk. The hardest part of creating a financial plan is not the initial plan itself, it’s implementing the plan. You have to be flexible enough to know when to update your financial plan and when to stick with the original version. A lot of this comes down to luck and the timing of bull and bear markets or personal financial emergencies.

A 90/10 portfolio is certainly not for everyone in retirement but it can be done if you understand the risks, your personal risk profile and potential range of outcomes.

I hit on this question on this week’s Portfolio Rescue:

We also discussed investing in municipal bonds, the pros and cons of buying a new home and how to diversify a concentrated portfolio of individual stocks.

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Further Reading:
What If the 4% Rule For Retirement is Now the 5% Rule?

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