New Study Changes My Mind
What percentage of bonds should be in your investment portfolio at retirement may change based up information from a recent study published in the Journal of Financial Planning (Jan. 2022). Author and university professor Stephen Larson, PhD., published extensive research looking at back tested withdrawal results over 30 years based on different bond allocations ranging from zero to 100%.
Amazing results show that having zero percent of your portfolio in bonds resulted in the largest amount able to be withdrawn (Expected Dollars Out) over a 30-year lifetime of retirement. Starting with $2 million in savings and investments, his Table 3 shows these details:
Source: Stephen Larson, PhD.
These figures don’t show deductions for taxes and investment management fees. Dr. Larson used the time 1926-2020 and the resulting investment returns.
The purpose of the article was for financial planners and advisers like me to ponder a Required Minimum Distribution (RMD) withdrawal strategy using the typical stock to fixed income allocation of 50/50 with the expanded dollar out strategy pictured above using a lower or higher percentage of bonds. According to another study by Ameriprise Financial in a survey of more than 1,000 retirees with at least $100,000 in investable assets, 68 percent of retirees taking retirement distributions use the minimum RMD method (Barney, 2018)
The table above shows the variable swings in RMDs over time at different asset allocations of stocks to bonds. RMDs can be quite volatile depending on asset allocation as the table demonstrates. What I saw was the tradeoff between RMD volatility and total dollars expected out over a life expectancy.
Now is the time for pre-retirees to maybe rethink their asset allocation versus volatility and risk. Reward may come from more risk as this study shows, but it may not be the total answer.
As for me, I’m changing my mind about my asset allocation as I enter retirement soon. I’m willing to take more risk (volatility) for more reward, but I have five years in my Bucket 1 cash reserves not included in my asset allocation. If this commentary on Dr. Larson’s study causes you to reconsider your allocation, please consult your financial adviser. This takes a lot of thought and understanding of other dimensions too.