Against The Grain
Making Money in Your Retirement Years
No one should be taking risks in their retirement years, and certainly not in the stock market. Right?
As far as conventional wisdom is concerned, those nearing retirement are advised to invest conservatively; hold more bonds and decrease stocks. After all, nobody wants to outlive his or her money due to a stock market crash.
However, a June 2019 Barron's article: "A Road Map for More Retirement Income," by Steve Garmhausen quotes two influential contrarians within the financial industry, who disagree with this approach.
Michael Kitces, a partner with Pinnacle Advisory Group in Columbia, MD, and Rob Arnott, founder of investment firm Research Affliliates, argue that retirees should actually be doing the very opposite of what is traditionally advised.
The conventional approach suggests that since you have less life expectancy, you also have less time to recoup from market losses. The result? A popular rule of thumb that says your allocation to stocks should equal 100 minus your age. So when you're 70 your portfolio should be 30% stocks, and 20% when you're 80.
Kitces suggests otherwise. He advises navigating potentially dangerous market volatility in the early years of retirement by making portfolios more aggressive, not less, over time. By selling bonds for income early in retirement, stock exposure will rise. After getting through the first 10 or 15 years, you "come out of your bond shelter and revert to your normal portfolio," he says. The bonds in question are safer, short to intermediate term notes, either laddered or in funds. At CAIM we discuss this with our clients by suggesting they keep 1-3 years of income needs in cash like investments. This can include any combination of money market funds, CDs, or short term bonds depending on the clients needs.
Turns out going against the grain can potentially bring better results. If the first 10 years of the stock market are strong, the client emerges with a nice fat portfolio; if stocks plunge clients still come out ahead by holding the stocks. Having avoided locking in losses they are now more likely to enjoy a rising market, according to Kitces.
To prove this point Kitces, along with Wade Pfau, professor of retirement income at the American College of Financial Services, tested 121 different stock "glide path" options under thousands of simulated market scenarios. In the worst-case scenarios the test found that increasing equity exposure (instead of jacking up bond holdings), actually increased the lifespan of a portfolio from 26.5 years to 30 years or more. The optimal blend was 30% equities at the beginning of retirement, increasing over 30 years to 70%.
In a world where the 10-year bond is yielding 2.1% and money market funds moving below that, it becomes more important than ever to have our investments work harder for us. CAIM's portfolio on average has a 3% dividend yield. This yield is above the 10-year treasury bond yield and above the SP500 yield. The stocks we choose have the financial strength to increase their dividends greater than the average company. Year-to-date our companies have had an average dividend increase of 11%, well above the SP500 increase of 7%.
Individual investors are living longer, healthier lives. Focusing on companies that have strong financials, and the ability to generate above average dividend increases, is how we at CAIM guide our clients in order to not outlive their money.