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Follower ○○○

Are Higher Stock Allocations the Only Option for Retirees?

I typically post on Bogleheads because I am a passive investor. I decided to post my question here to see if there are any other ideas. 

Retirees typically hold a high allocation of bonds. In my case 70%. Given the disastrous outlook for bonds, already showing negative returns in real term for the future, what are the options to retirees short of letting the portfolio erode or taking more risk in the equity market?
I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?

Note: Returns from bonds, unlike stocks, are known (present yields tell the bulk of the story); thus, let us agree not to challenge my premise on bonds.

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Participant ○○○

Re: Are Higher Stock Allocations the Only Option for Retirees?

For us Bogleheads that's our only option. If interest rates were "normal" we'd also be at 30/70.

Because of low interest rates we are at 50/50. We're even considering 60/40.

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Participant ○○○

Re: Are Higher Stock Allocations the Only Option for Retirees?

An idea I consider but would not do is to hold a 100/0 port consisting of ONE equity dividend fund or ETF and live off the net dividenf cash income.

My favorite for US investors is SCHD. 12 mo yield = 3.54%.

For nonUS investors like us it would be VHYD. 12 mo yield = 3.31%.

This is a good basic article about income investing.

https://www.morningstar.co.uk/uk/news/204020/dividend-investing-back-to-basics.aspx

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Frequent Contributor

Re: Are Higher Stock Allocations the Only Option for Retirees?


@AlwaysPassive wrote:

I typically post on Bogleheads because I am a passive investor. I decided to post my question here to see if there are any other ideas. 

Retirees typically hold a high allocation of bonds. In my case 70%. Given the disastrous outlook for bonds, already showing negative returns in real term for the future, what are the options to retirees short of letting the portfolio erode or taking more risk in the equity market?
I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?

Note: Returns from bonds, unlike stocks, are known (present yields tell the bulk of the story); thus, let us agree not to challenge my premise on bonds.


             Well given erosion, spending down and not taking more risk your right there is no solution. You either have to spend less or take more risk and worry about the unknowns anyway in all scenarios. So if that is the case I’d take more risk.

             Maybe try individual positions that pay out more sure income then you need like utilities or Aristocrats. Forget depending on Mr. Market, allocating, studies  and tinkering forever. Form a group of those types and let it go. You’ll get a little growth and a little raise each year with some doing better and some not as good. Only switch out anything that drops their dividend.
               
             You could also use a HY position like VYM a value index or VWAHX a national muni fund to what you have or to the above. Just in case Mr. Market smiles on you during your remaining years a pure cheap growth index like VUG might help also.

              Being a passive or active investor is a conscious choice though. Maybe an annuity is best. The market isn’t for the faint of heart. Personally I view fear as a long term money making opportunity. I see greed as a time to take gains off the table. 
                 

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Follower ○○○

Re: Are Higher Stock Allocations the Only Option for Retirees?

Are you retired? I truly fear 50+% stocks

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Frequent Contributor

Re: Are Higher Stock Allocations the Only Option for Retirees?

Buy an annuity that will provide a fixed monthly payment for life.

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Participant ○○○

Re: Are Higher Stock Allocations the Only Option for Retirees?

Wife and I are 63 y/o retirees. We let Vanguard Target Retirement Funds guide our AA.

In 2025 we turn 68. So VTRF 2025 is our target date. It says we should be at 60/40.

VTRF 2020 says 50/50. 

We choose the more conservative AA. We hold 50/50.


@AlwaysPassive wrote:

Are you retired? I truly fear 50+% stocks


 

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Frequent Contributor

Re: Are Higher Stock Allocations the Only Option for Retirees?

Although I am not a pure “indexer”, I also agree that incredibly low bond yields have redefined future asset allocations for many retirees. I’m not retired YET, but rapidly approaching retirement in two years. Always thought we’d be 70:30 or 60:40 going into retirement, but now revisiting that whole concept. Now considering much higher equity allocation, maybe 80:20 or so. The “good news” for us is our portfolio is much larger than I ever anticipated, and I’ll have a pension which covers ~35% of expenses, plus we’ll both have SS down the road (age 66-70).

Win
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Explorer ○

Re: Are Higher Stock Allocations the Only Option for Retirees?

speaking of 100% in one stock, galeno, here's something i read over on seaking alpha that some folks thought could work out quite okay:

xxxxxxxxxxxxxxxxxxxx

Here is a safe way to get 10% per year, every year, and NEVER run out of money.

Put all your money in SCHD. Withdraw 1% each quarter, sell in the money covered calls on the shares you are going to sell anyway to pocket another 2.5% per year, and get that juicy 3.5% dividend yield.

SCHD, on average, goes up 7% each year and the dividend increase 5% each year.

So to recap: 4% withdrawal + 3.5% divided.+ 2.5% covered call premium = 10% each year and never run out of money.

Got something better? Please share!

xxxxxxxxxxxxxxx

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Frequent Contributor

Re: Are Higher Stock Allocations the Only Option for Retirees?

Respectfully, I do challenge your premise.

I am 78 and continue to have a substantial (nearly 50% allocation) to bonds.  Yes, I am getting less income; yes, I am getting and have experienced substantial capital appreciation passed on to me through RMDs primarily.

Why is it that so many folks don't understand that bonds can (and do) provide capital appreciation and can (and do) ameliorate risk?

I wish I had a buck for every time over the years that I have read some statement similar to the following: e.g., "showing negative returns in real term[s] for the future."  The future is beyond my grasp.  But I have a firm grasp on my capital appreciation.

Bob

P.S. I have a high regard for many Bogleheads and am friends with several.  Is Taylor, for example, selling his Total Bond position in a three fund portfolio?  Maybe there is a distinction between Original Bogleheads and some newer claimants to the description?

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Contributor ○○○

Re: Are Higher Stock Allocations the Only Option for Retirees?

The discussion always seems to be only about yield. I don't get it. Does anyone think a bond fund PM is going to manage a fund to generate 1% TR per year?


@GLI2019 wrote:

Respectfully, I do challenge your premise.

I am 78 and continue to have a substantial (nearly 50% allocation) to bonds.  Yes, I am getting less income; yes, I am getting and have experienced substantial capital appreciation passed on to me through RMDs primarily.

Why is it that so many folks don't understand that bonds can (and do) provide capital appreciation and can (and do) ameliorate risk?

I wish I had a buck for every time over the years that I have read some statement similar to the following: e.g., "showing negative returns in real term[s] for the future."  The future is beyond my grasp.  But I have a firm grasp on my capital appreciation.

Bob

P.S. I have a high regard for many Bogleheads and am friends with several.  Is Taylor, for example, selling his Total Bond position in a three fund portfolio?  Maybe there is a distinction between Original Bogleheads and some newer claimants to the description?


 

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Frequent Contributor

Re: Are Higher Stock Allocations the Only Option for Retirees?

Asset Allocation is equity/fixed income.  I never touch bonds (fund).  My fixed income is mostly in stable value (2-3%).  It has different names like Metlife in my Fidelity 403B.  

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Contributor ○○○

Re: Are Higher Stock Allocations the Only Option for Retirees?

I am not sure stable value funds are available in IRAs, only other tax deferred accounts (401Ks etc.).


@51hh wrote:

Asset Allocation is equity/fixed income.  I never touch bonds (fund).  My fixed income is mostly in stable value (2-3%).  It has different names like Metlife in my Fidelity 403B.  


 

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Frequent Contributor

Re: Are Higher Stock Allocations the Only Option for Retirees?


@Gary1952 wrote:

The discussion always seems to be only about yield. I don't get it. Does anyone think a bond fund PM is going to manage a fund to generate 1% TR per year?


@GLI2019 wrote:

Respectfully, I do challenge your premise.

I am 78 and continue to have a substantial (nearly 50% allocation) to bonds.  Yes, I am getting less income; yes, I am getting and have experienced substantial capital appreciation passed on to me through RMDs primarily.

Why is it that so many folks don't understand that bonds can (and do) provide capital appreciation and can (and do) ameliorate risk?

I wish I had a buck for every time over the years that I have read some statement similar to the following: e.g., "showing negative returns in real term[s] for the future."  The future is beyond my grasp.  But I have a firm grasp on my capital appreciation.

Bob

P.S. I have a high regard for many Bogleheads and am friends with several.  Is Taylor, for example, selling his Total Bond position in a three fund portfolio?  Maybe there is a distinction between Original Bogleheads and some newer claimants to the description?


 


I think the OP believed that if he followed BH principles, e.g., age in bonds, he would be able to live off the bond yields In retirement and the bonds would never go below par. 70% in bonds will require a lot of capital to generate sufficient retirement income which is is why I invest in higher yield dividend stocks taxed at cap gains rates.

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Frequent Contributor

Re: Are Higher Stock Allocations the Only Option for Retirees?


@Gary1952 wrote:

I am not sure stable value funds are available in IRAs, only tax deferred accounts.


@51hh wrote:

Asset Allocation is equity/fixed income.  I never touch bonds (fund).  My fixed income is mostly in stable value (2-3%).  It has different names like Metlife in my Fidelity 403B.  


 


SV funds have restrictions that are possible only in 401k/403b/457, so they are available there only, not in IRAs.

YBB
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Contributor ○○○

Re: Are Higher Stock Allocations the Only Option for Retirees?

I didn't type what I meant. Meant to say only available in other tax deferred (401Ks etc.)


@yogibearbull wrote:

@Gary1952 wrote:

I am not sure stable value funds are available in IRAs, only tax deferred accounts.


@51hh wrote:

Asset Allocation is equity/fixed income.  I never touch bonds (fund).  My fixed income is mostly in stable value (2-3%).  It has different names like Metlife in my Fidelity 403B.  


 


SV funds have restrictions that are possible only in 401k/403b/457, so they are available there only, not in IRAs.


 

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Frequent Contributor

Re: Are Higher Stock Allocations the Only Option for Retirees?


@Gary1952 wrote:

The discussion always seems to be only about yield. I don't get it. Does anyone think a bond fund PM is going to manage a fund to generate 1% TR per year?


@GLI2019 wrote:

Respectfully, I do challenge your premise.

I am 78 and continue to have a substantial (nearly 50% allocation) to bonds.  Yes, I am getting less income; yes, I am getting and have experienced substantial capital appreciation passed on to me through RMDs primarily.

Why is it that so many folks don't understand that bonds can (and do) provide capital appreciation and can (and do) ameliorate risk?

I wish I had a buck for every time over the years that I have read some statement similar to the following: e.g., "showing negative returns in real term[s] for the future."  The future is beyond my grasp.  But I have a firm grasp on my capital appreciation.

Bob

P.S. I have a high regard for many Bogleheads and am friends with several.  Is Taylor, for example, selling his Total Bond position in a three fund portfolio?  Maybe there is a distinction between Original Bogleheads and some newer claimants to the description?


 


Low yields below the rate of inflation will be the tsunami that will wipe out the retirement income of many BH investors who relied on age in bonds for their asset allocation.

When bond yields begain to decline 5 years ago I substituted high dividend yielding stocks for the 20% of my portfolio that was invested in Corporate and muni bonds. The dividends provide half of my investment income taxed at cap gains rate. I have no regrets about being 90% in equities especially tech, QQQ and repair companies.

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Participant ○○○

Re: Are Higher Stock Allocations the Only Option for Retirees?

Too scary!

If my port were 100% SCHD I would never sell shares. And I would only spend the after tax dividend cash income.


@linter wrote:

speaking of 100% in one stock, galeno, here's something i read over on seaking alpha that some folks thought could work out quite okay:

xxxxxxxxxxxxxxxxxxxx

Here is a safe way to get 10% per year, every year, and NEVER run out of money.

Put all your money in SCHD. Withdraw 1% each quarter, sell in the money covered calls on the shares you are going to sell anyway to pocket another 2.5% per year, and get that juicy 3.5% dividend yield.

SCHD, on average, goes up 7% each year and the dividend increase 5% each year.

So to recap: 4% withdrawal + 3.5% divided.+ 2.5% covered call premium = 10% each year and never run out of money.

Got something better? Please share!

xxxxxxxxxxxxxxx


 

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Explorer ○

Re: Are Higher Stock Allocations the Only Option for Retirees?

I'm in a similar position at 77 with my equity target at 25-33% of my portfolio (presently @ 25%). 

In the bond/cash space I'm unclear what direction to go as over the next year I have a number of CD's, earning 2.40-3.05%, that will be expiring & comprise approximately 22% of the portfolio. Over the past 3 months I have added gold in this space. Originally went with GDX and around a month ago moved to GLD. This is currently around 5% of the portfolio. I will probably be adding to this position on dips going forward and until it starts to reverse itself. 

For the OP I would consider looking into gold, commodities and perhaps utilities as other options for a "portion" of the bond space. Otherwise I believe bond ETF's and funds will continue to perform from a capital appreciation standpoint and would not discount them until that changes. Despite the hit that many took in March, YTD bond funds are doing very well.

 

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Frequent Contributor

Re: Are Higher Stock Allocations the Only Option for Retirees?

 

Hi Alwayspassive...I'll try to answer your question re alternatives.

First, I agree with your bond outlook and assessment.  One needs to recognize there comes a time when a reasonable investment is no longer desirable.  Like: I wonder what the posters will be saying if we get zero percent interest across all maturities/durations (almost there!).

Alternatives: (which may be an assortment of)

--Preferred share funds.  You get a yield that is farther up the capital structure.   Meaning stocks cannot pay dividends unless preferred dividends paid first.  Lot's of safety here.  Yields very good.

--Gold and silver.  The insight needed here is that gold is not an investment...as it never pays a dividend, and it never grows.  Buy a gold coin and stare at it for thirty years, and it doesn't double into two coins...or four coins.  The good news: it doesn't go to a half a coin.  It is a store of value, that doesn't go bankrupt.  It keeps up with prices.  Thus, expect a real return of zero, which beats negative returns on bonds.  Consider owning some physical  precious metal possessions as well...for various reasons.(USA Gvt took peoples gold, last century).

--rental real estate property that you own directly.  Think Downton Abbey...what the rich owned before stocks.  Financial parameters on rentals not only haven't declined, but are going favorably upward vis-a-vis bonds.  That is, yield returns annually of 5-6% are not unreasonable (after all expenses), and growth of the underlying asset most likely.  Tax benefits due "depreciation" etc, a non-cost deduction. Not like being a landlord--farm it out for 10%; hire a property manager.  Disclosure...I own a rental single family residential property (hot now due Covid) in Florida, managed by a property manager.

--Leveraged fixed income closed end funds.  Not for everyone...but here, you take advantage of the extremely low rates...whereby fund managers borrow money, and reinvest at higher rated coupon bonds/mortgages, etc.  Yield boosters.  Good for at least a few percentages of ones portfolio.  See PCI and PDI.

Diversify your risk in these, by owning more than one to supplement your portfolio.

BTW...I own all of the above!

Good luck.

R48

 

 

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