Thu Dec 05 2024, by Tyler Gardner

Why You Should Never Invest in Bonds During Retirement

I'm Tyler, a former financial advisor and portfolio manager. Now, I create financial content for free, so you don’t have to pay for it. Today, I want to share the findings of a well-known study conducted by three Trinity professors in 1998, which examined the success rates of different withdrawal strategies over a 30-year historical time horizon.

Key Findings from the Study

1. Traditional 4% Withdrawal Rate: If you were looking to spend the traditional 4% of your assets annually in retirement and were invested 100% in stocks, you had a 98% chance of never running out of money. However, if you had invested 100% in bonds, your chances dropped to 50%.
2. 5% Annual Withdrawal: For those feeling a bit more adventurous wanting to withdraw 5% annually, your chances of sustaining this with a 100% stocks investment were 81%—only a stark 34% for those invested solely in bonds.
3. 6% Annual Withdrawal: If you were really pushing the envelope with a 6% annual withdrawal rate, the success rates were still dismal. A 100% stock investment gave you a 59% chance of success, while a 100% bond investment offered only a 15% chance.

Why the Traditional 60/40 Portfolio?

So why are we often advised to balance our portfolios and invest more heavily in bonds as we approach retirement? The answer is that most retirees cannot handle the volatility that comes with stocks. As my mother always used to say, “Tyler, you’d be hot too if you just came out of the oven.” While it may be a colorful expression, it resonates with the reality that retirees often fear loss, leading them to safer, but potentially less rewarding, investment choices.

Final Thoughts

If you found any of this information helpful, please like and follow for more insights. My goal is to help you get one step closer to financial security.

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