Retirement Planning Part 4 – What Should I Invest in While in Retirement

In Part 3 we discussed how to determine how much money you’ll need or have in retirement. In this post we’ll discuss what type of investments you should have in your portfolios.

Let’s start with the premise that your retirement plan calls for you to withdraw 4% a year from your investments to cover your expenses. This is a common benchmark used by many planning tools. A common recommendation is that you maintain an allocation of stocks vs. bonds that match your age, for example if you are 65 years old you would have 65% invested in bonds and 35% in stocks. We’ll look at your investment options.

What should I invest in?

  1.  First of all these general recommendations were pretty good when we had a “normal” market environment. 65% in bonds or any fixed income was not a problem since the US 10 year Bond yields from 1996 to 2006 ranged from 5% – 16%. If you wanted to withdraw 4% and were making 5%+ you were in pretty good shape. Today 10 year Bonds yield under 3%, with Bond prices surely headed down. Therefore you are stuck with a rapidly depreciating asset. Furthermore, you are withdrawing more than you are earning. Bonds today are safe, but not the best investment.
  2. Stocks, by comparison have had a pretty good run since the 2009 market lows. For the smart people (brave) people who hung on to their solid stock investments through the recession, they are now back to all-time highs. The poor people who were panic struck and sold at the bottom of the market and stayed in cash for a year or so, they are financially stuck.
  3. Given the current market conditions investors should look to overweight stocks, especially those with solid dividends. Many of these stocks have “bond-type” yields and have the possibility of both increased yields and growth in value. I’ll cover some of these possibilities in a separate posting, including stock preferred shares, MLP’s, BCD’s and REITS. For your general investment pick household names that have a solid track record of dividend growth such as:
    1. Verizon 4.37%
    2. Altria 4.23%
    3. American Electric Power 3.49%
    4. Proctor & Gamble 2.80%
    5. Microsoft 2.57%
  4. All of these recommendations need to be adjusted on an annual basis, just like rebalancing your portfolio. Some of these investments might be “buy and hold” but not “buy and forget” as I explained in a prior article. Some people think this is like day-trading, a risky practice if you’re not properly trained, but it isn’t. There are a few individual stocks you can keep forever, but many need to be swapped out. One good practice is to set goals when you buy a stocks, you need a purchase price and a sale price, before you buy. Don’t buy at the top and sell at the bottom.
  5. Many people may not feel like picking individual stocks, they are better off buying Exchange Traded Funds (ETF’s). ETF’s are usually better than Mutual Funds because they are more transparent and easier to understand. ETF’s trade like stocks, Mutual Funds trade based on a NAV, Net Asset Value, this is calculated at the end of each day.
  6. So what about bonds? It’s OK to have a small bond position today, just make sure they are of “short duration” and keep an eye on the core price. High quality corporate bonds are OK. As prices drop over the next 6 months get out and sit in cash or high dividend stocks until bond yields climb above 4 or 5% then start buying on a “ladder” basis.

In summary, you can’t withdraw 4% on an investment only yielding 2-3%, you’ll run out of money sooner than later. In the current market high quality, high dividend stock or stock ETF’s  are a safe bet.

In our next post we’ll discuss how some specific investments will help you grow your portfolio to meet your retirement needs.

Warning – Check your 401K and IRA’s for Bonds and SELL them Quickly!

Many people own bonds today, why not there has been a 20+ year bull market for bonds. However, that is all about to come to an end pretty quickly. Bonds have been the backbone of fixed income investing for many years. Existing Bond holders are going to see the value of their investments drop substantially. You don’t think you own any Bonds, just check some of your mutual funds in your 401K and IRA and you might be surprised at how mucj you own.

When the Fed stops or “tapers’ its buying of assets, currently $85 billion per month, bond yields will go up and Bond prices will drop. If you still own Bonds, you’ll keep getting your dividend, however the value of the Bond or fund will fall. What good is an investment that pays a 3% dividend, but goes down 9% in price?

Here is what you need to know about Bonds:

1. When Bond prices go up, Bond yields go down. This is what has been happening as the Feds keep buying  Bonds.


2.  Normally the value of equities (stocks) are the opposite of Bond prices. This last year has however been an exception. Up until January 2013 the price of stocks and bonds often traveled in the same direction. But that has all changed now, see the chart below, it compares the price of the 20 year Bond fund (TLT) to the S&P 500.


Now is the time to get out of your existing Bonds. As Bond yields go up (and prices drop) you may want to get in at a later date.