Allison Schrager from Bloomberg is not a fan of people targeting a magic number for their retirement goal. She says it puts the focus on wealth when it should be on income.
My take on this has always been that while some sort of number helps in the accumulation process, it provides some context. Once you actually retire, the thing that matters is what you actually wind up with. That is your reality whether you are ahead or behind whatever goal you had.
Apparently, Schrager places a lot more importance on income being precisely predictable than we typically do here which leads her to long term bonds as an important solution. Schrager says "If you focus on a number, however, you’re likely to suffer from a mismatch. That’s because you’re maximizing the wrong thing — wealth instead of income." She means a mismatch of liabilities.
In a word, no. That is might be correct in the textbook but I would say not in real life.
I think my sample size is large enough in terms of years and number of clients that people are not constantly analyzing how much they take. They start with some amount for a few years and then might say they need to increase the dollars they take. If someone is in the 4-5% withdrawal range then they are going to be just fine with their withdrawal rate. Their equity exposure, whether low/normal/high, will very likely provide enough growth to counteract Schrager's concern.
Per Gemini, in rolling ten year periods since 1900, bonds have only outperformed stocks 7% of the time. The 7% were concentrated in the great depression and the lost decade of the 2000's. According to testfol.io, in the 1930's despite the volatility and enormous declines, stocks compounded negatively by only 12 basis points. The lost decade was a little worse with nowhere near the same volatility.
This places an emphasis on owning some equities, yes, but more importantly dialing in the correct allocation to equities for your tolerances. In the 20 years ending 12/31/2014, domestic equities compounded at 9.87% per testfol.io. I chose that period because it takes in really good times and really challenging times. If in the first 20 years of your retirement, equities only compound at half that rate, that would still be better than spending a 4-5% coupon for the same period. $100,000 in equities would grow to $265,000 in 20 years or stand at $117,000 if they had been taking 4% out every year versus having $100,000 in bond principal after 20 years. While 100% in equities might not be the right answer, having nothing in equities is not the right answer either.
Our example assumed a weak growth rate. Since 1900, only 20-23% of ten year rolling periods have stocks compounded at 5% or less.
Again, dial in the correct equity exposure.
While we devote a tremendous amount of time on how to build the yield sleeve of a portfolio, long bonds can work all the same even though I would say long bonds are far from optimal.
A portfolio can be constructed for someone who is stock market skittish with a decent allocation to equities which could be 30-40% with a larger portion in some sort of yield engine mix and some cash left over to mitigate sequence of return risk.
Here's an example with equities dialed down. I just used market cap weighting for the equities, nothing special.
AOM is a 40/60 ETF which is closer to the allocation we built today. Plugging Portfolio 1 into Finominal, it lags behind whatever they have for 40/60 for a shorter period but their benchmark is far more volatile.
The equity portion, large or small, will double eventually. Maybe it will take a long time or maybe quickly. In the period studied on testfol.io, the S&P was up 257%. While I would not bet on another 257% over the next nine years, it will keep growing if it can be left alone.
This might address Schrager's concern, letting the yield engine do just that, pay out some yield. If someone barely has accumulated enough for their retirement then they are going to need to have a normal allocation to equities or make a big change somewhere else like maybe continuing to work.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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