How retirees can protect their income needs.
Oct/28/08 11:43 PM
How can
retirees meet their income needs and manage current
market risks?
A Barbell portfolio is comprised of 50% very safe assets and 50% very risky assets. It did surprisingly well during the 1929 crash and also during the recovery from the 1974 crash. While it's had mediocre long-term performance, it does provide substantial benefits to retirees during extreme market environments like the ones we are seeing today.
What if we're halfway through a 1929 crash?
As you can see, changing to a Barbell portfolio in the middle of the 1929 crash safely funded an annual $50,000 distribution and still exposed the portfolio to enough equity risk so that it was able to recover when the markets rebounded.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
What if it's 1974 and we're about to recover?
The Barbell portfolio still did surprisingly well during the recovery period after the 1974 crash. It even outpaced the S&P 500 shown by the light blue line above.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
Why did this portfolio do so well in tough times?
There are two main reasons this portfolio has performed well during extreme market conditions:
A Barbell portfolio is comprised of 50% very safe assets and 50% very risky assets. It did surprisingly well during the 1929 crash and also during the recovery from the 1974 crash. While it's had mediocre long-term performance, it does provide substantial benefits to retirees during extreme market environments like the ones we are seeing today.
What if we're halfway through a 1929 crash?
As you can see, changing to a Barbell portfolio in the middle of the 1929 crash safely funded an annual $50,000 distribution and still exposed the portfolio to enough equity risk so that it was able to recover when the markets rebounded.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
What if it's 1974 and we're about to recover?
The Barbell portfolio still did surprisingly well during the recovery period after the 1974 crash. It even outpaced the S&P 500 shown by the light blue line above.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
Why did this portfolio do so well in tough times?
There are two main reasons this portfolio has performed well during extreme market conditions:
- First, the government bonds were able fund the income distributions.
- Second, the small cap stock exposure provides a high level of market risk. Fortunately small cap investors have historically been rewarded for this risk.
Don't run out of money!
Aug/13/08 11:08 PM
A common fear among investors is not running out of money as they age. For the very wealthy this means protecting capital, but for most people this means growing a portfolio at a reasonable rate and withdrawing just enough to live.
This begs a common question: What is a reasonable withdrawal rate?
The first question many retirees ask is how much money they can safely extract from their portfolio each year. The easiest way to express this is using a withdrawal rate, expressed as a percentage of your investment assets.
Our research and the research of others shows that withdrawal rates that could support an investor over a 30-year retirement have varied from 4% to 6%, depending on the asset allocation of the portfolio. You should revisit your retirement plan if you are withdrawing more than 6% annually. Most importantly, remember to measure how much you are withdrawing so you can analyze this withdrawal risk.
A broadly diversified investment strategy, similar to our University-style portfolios, can help investors meet their retirement income need and reduce the risk of running out of money.