September 27, 2018

What Should My Asset Allocation Be in Retirement?

This question needs to be addressed, especially after a long bull run in the stock market. It was also asked a lot in the personal finance survey you guys filled in.

Let me lead with the conventional wisdom: your percentage allocation to bonds should be approximately equivalent to your age. So if you are 70 years old, you should have a 70 percent allocation to bonds.

In general, I think people should almost always have a higher allocation to bonds. Whatever you think your allocation to bonds should be, double or triple it.

I know first-hand that some financial advisors are keeping some of their older clients fully invested in the stock market well into retirement. I consider that to be financial malpractice. A 72-year-old grandparent does not need an allocation to aggressive growth.

Here’s why: when you are in retirement, you are no longer accumulating assets. You are decumulating assets. If you have an IRA, this is required by law—you are forced to sell a piece every year. An economist would say that you are selling investments to pay for consumption.

And consuming is exactly what you should be doing when you sell stocks and bonds in retirement: traveling to Europe and staying in an Airbnb for a month. This is the whole point of why you save and invest—so you can fully enjoy it at the end. My philosophy.

The Thing About Decumulating Assets

Of course, you want the assets to actually be there when you decumulate. Yes, there are instances where bonds are not safe. But bonds are generally safer, unless you are talking about high yield or emerging market debt.

I can see where this is going in the comments section—sure, in extraordinary circumstances, you could have a situation where an investment grade corporate bond fund loses 15-20% in value. Still better than what could happen to stocks in similar circumstances.

The point of target retirement date funds is that your portfolio mix goes from aggressive to conservative over time, so you are sure you have something at the end.

That’s why you don’t buy aggressive growth in your eighth decade, only to watch helplessly as it takes a giant dirtnap, forcing you to curtail consumption in your golden years—or leave less for your heirs. Bear markets are terrible things. People are pretty glib about them, nowadays, because it’s been so long since we’ve had one.

I am a bit like the Jiminy Cricket of asset allocation. I am very, very conservative. I make mistakes all the time. I prefer them to be small—the best a lot of people can hope for is to not make any big mistakes. A financial advisor worth his salt will not blow up his clients on stupid stuff.

NONE OF THIS IS NEW. This is what passed for conventional wisdom for years. But it’s a bull market, and people are getting aggressive. This letter has a great many readers in retirement. I would bet that up to half of them have an allocation to stocks of over 50 percent. No offense, Baby Boomers—you guys are not the best risk-takers in the world.

How do I know this? See below.

Source: The Daily Shot

Equities now make up a larger portion of household net worth than residential real estate. People are gorked up on stocks. As you can see, this happened a couple of times before—both resulting in bear markets.

If you bought a growth stock like Amazon or a growth mutual fund, you have watched it grow to the sky over the last ten years. It makes up a large percentage of your portfolio. Sell when you can, not when you have to.

Start Thinking like a Bond Investor

I think that if you are in retirement—particularly if you are age 70-75 and up, your allocation to equities should be pretty close to zero. This is currently not the case.

For years, people were incentivized to load up on dividend stocks—because they were yielding more than bonds! Soon, that might not be the case. And the dividend stocks themselves are very overvalued.

The sad truth is that there aren’t many options. Stocks are expensive. Bonds are not so cheap, either. I can envision a scenario where all financial assets fall together.

Always think of the worst-case scenario: if that happens, you want exposure to the least worst option. Stock investors are optimists. Start thinking like a bond investor—a pessimist.

Jared Dillian
Editor, The 10th Man

Share Your Thoughts on This Article

Was this email forwarded to you?
Click here to get your own free subscription to The 10th Man.

Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Outside the Box, Over My Shoulder, Transformational Technology Alert, Rational Bear, The 10th Man, Connecting The Dots, Stray Reflections, Street Freak, ETF 20/20, Macro Growth & Income Alert, In the Money, and Mauldin Economics VIP are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

© Copyright 2018 Mauldin Economics