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We have been discussing the value of a 60/40 investment portfolio in HD as a way to balance risk/reward over the long term.
A report I read today suggests an all-equity portfolio, with a focus on international stocks, could be the key to maximizing retirement wealth compared to 60/40 allocation or target-date funds. It says an all equities portfolio is the far better way to build the largest nest egg possible for retirement; to generate a larger paycheck in retirement; to make sure you don’t run out of money in retirement; to create the largest possible bequest for your loved ones. The recommendation is to Invest 100% of your savings earmarked for retirement in equities: one-third in U.S. stocks and two-thirds in international stocks.
If you are more risk averse, having an annuity to cover basic expenses may make it easier to use an aggressive stock allocation with the remaining investments.
This is different from my current allocations. I am exploring any changes I should make.
See link
Some may already be using such a strategy or similar ones. What are the pros and cons based on your experience? Would you consider changing your current strategy?
We opted for a TIPS ladder for our reliable income to supplement delayed social security payments. We built this in 2023 as I started my retirement planning. My spouse wants to work a few more years after I retire.
This afforded us a 90-10 equities/bonds risk portfolio where the equities are 70-30 US/foreign and equal weighted across large/small and growth/value. We hope this portfolio to cover our discretionary spending desires.
We plan to take a reverse mortgage when eligible for reserves to pay for any LTC and other unanticipated spending shocks.
Mark, do you mean equal weighted or market weighted?
“and equal weighted across large/small and growth/value.”
We invest the same percentages in index funds across small, large, value, and growth. We rebalance based on a threshold.
I’m familiar with the article. My take is it is “not for us in retirement”-too much risk (and we have “enough”). We had basically a 50/50 AA until last year when I adjusted the investable assets to 60/40 after buying QLACs. (If we factor in the QLACs its more like 53/47). I’m mulling the idea of moving the investable assets to 70/30 when my wife begin SS and a couple of delayed small pensions in a couple of years. I feel like we have longevity risk covered by the delayed SS, pensions and QLACs and inflation risk covered by a rolling TIPs ladder, SS, one small pension with diet COLA and the stock allocation. d
Is a diet COLA a fixed increase not tied to inflation?
I’ve also read the advice of certain experts who suggest we consider our social security benefit to be a bond when looking at our portfolio allocation.
That is exactly how we look at it. We have two pensions and two S.S. incomes that cover over 100% of our expenses. That is what we planned and expected would happen so we have always and still have our retirement and HSA 90/10 stock market indexes and cash
The most important for me as a retiree was to have a big portfolio (now at 50+ times our annual expense) and protect our money to age 75. After that, the risk of not making it is lower. That solves LTC, basic expenses, longevity, and using annuities.
For people who worry about longevity, there is a “simple” solution: deferred annuity. If you invest $100K at age 65 in a simple annuity, you get about $6K per year; if you invest $100K and start collecting at age 85, you get over $60K. That makes a lot more sense. See this site: https://www.schwab.com/annuities/fixed-income-annuity-calculator
For years I was invested in 90+% in stock funds, but since retirement in 2018, it has all been in unique bond funds + avoiding all the big meltdowns. The performance is similar to stocks. It took me just 15 years to develop it. Read https://fd1000.freeforums.net/thread/3/portfolio-performance-over-years
My wife and I did exactly this after the 2022 bond “crash.” We replaced our 60/40 bonds into 60/40 annuities, 2% COLA lifetime annuity. We increased our stock portfolio to 100% growth. Now we are 100% confident in our retirement. Our sequence-to-returns risk has essentially dwindled to zero since between our Social Security and annuities, our protection bucket covers our essential and discretionary spending.
I was thinking about getting annuities, but now I’m leaning toward building a TIPS ladder instead for the guaranteed inflation protection.
What if we get 5% inflation? We’re still not back to 2% and it looks like we’re headed up, not down.
Living in the US, I would not put twice as much in foreign stocks as US stocks. I actually have that reversed for our portfolio.
One convenient option, based on your strategy, is to be in VT (Vanguard Total World Stock ETF), which has 67.4% of stocks in North America and the rest in Foreign stocks.
Sundar, I prefer VTI (Vanguard Total Stock Market ETF) & VXUS (Vanguard Total Intl Stock ETF). I’d invest in VT except for a few reasons:
1) Expenses are slightly higher for VT.
2) Can’t tax-loss harvest as well.
3) My asset allocation spreadsheet would be more complex due to having to split VT into US & international stocks.
VTI and VXUS combination is more flexible, as you say. Question: How should one decide on the right ratio between the two?
That is the question. I prefer a mix somewhat north of VT in part since I’m spending dollars in retirement.
Does’t the advice pertain especially well to maximizing Social Security? Financial advisors seem to miss the big advantage of maximizing SS being naturally more aggressive in stocks. My guess it’s more advantageous to them to keep higher investment account balances and patrons fearing more of investment turn downs. The blog “Fat Fire Lady” lists an acceptable retirement investments from Vanguard being VTI or VOO for life. I think the reason or justification for such a simple portfolio exists because of starting young with much personal capital to earn and contribute to monthly savings is such a big advantage. Your account balances are so far above being conservative that draw downs are less threatening.
Here is a different perspective, from someone already in retirement, and using this “strategy.”
In anticipation of retirement in January 2004, in mid-2023, I bought four annuities, comprising @45% of our portfolio. 3 of the 4 were funded with Roth Dollars.
In September 2024, we began receiving income from 2 of the 4 annuities. In February 2025, this month we will begin receiving income from the other 2 of the 4 annuities. Total Income from the annuities will be $36,560, annually. Added to our Social Security Benefits of $74,340, that produces $110,900 in guaranteed income. In addition, we are subject to RMD,s but I have put 90% of them in QCDs the last 3 years. In 2024, our RMDs were @ $15,460.
To address the issue of inflation, while the annuities have no associated COLA, the Social Security does. However, 78% of the annuity income is income tax free, since, again, they were funded with Roth dollars. We are 74 and 70 years old, in decent health, and debt free. Inflation will play a part in our future purchasing power considerations, but due to our ages, not as big a part as it would have, had I retired at 62 or 66. I did wait until 70 to file for my Social Security benefits.
As an aside, our annuities have a LTC benefit associated with them as well as being Joint Life contracts.
The rest of our portfolio is invested 100% in equities…VTI and VXUS, @ 90/10%. Since we are not using these funds for income presently, the risk associated with a 100% equity portfolio is acceptable.
Now…as to whether young people should be in an all equity portfolio, I refer you to JL Collins’ book, “The Simple Path to Wealth.” Not only do I believe they should be, Collins recommends the actual Fund…VTSAX, Vanguards Total US Stock Market Fund. I prefer the ETF version, VTI.
For those requiring some “smoothing,” as they age, he recommends adding VTBLX. Again, when I had Bonds in my portfolio, prior to replacing them with Annuities, I used the ETF version, BND.
One man’s Opinion!
Kevin, this is a well designed road map. Very helpful. If guaranteed income has a cushion above basic expenses, it may take care of some inflation in future years too.
Kevin, thanks for a clear and detailed description of a solid retirement income plan. If you are so inclined, I think it would be interesting if you could provide some more detail about the annuities and the LTC component. It’s not a product I’m familiar with but I’m interested in learning more about them.
Wade Pfau the author of “Retirement Planning Guidebook” commented in the article: “But having protected income sources – such as an annuity – to cover basic expenses may make it easier to use an aggressive stock allocation with the remaining investments,” I recall a number of articles over at Morningstar about “The death of the 60/40 portfolio.” It and similar articles were prompted by the bond market decline of 2020-2022.
I guess it depends in part on how one deals with white knuckle market declines such as 2007-2009. For those in retirement what is perhaps more important is how a 100% stock portfolio fares with RMDs. Christine Benz at Morningstar addresses this regularly, as well as how her “bucket portfolios” do.
https://www.morningstar.com/retirement/how-retirees-can-determine-safe-withdrawal-rate-2025
In that article Benz looks at safe withdrawal rates of portfolios containing 0 to 100% equities over periods of 10 to 40 years. The table indicates highest safe withdrawal rates occur with portfolios containing no more than 60% equities, 90% success rate.
What one could conclude, looking at the S&P 500 returns is this: investing heavily in stocks while young can provide the highest possible returns when compared to cash and bonds. However, there have been periods when bonds did better than the S&P 500 stocks, including 1968-1978, 2000-2003, 2007-2009. Recently, since 2009 the S&P 500 has done better than bonds.
Recent equity performance and rapid return after sharp market downturns may have emboldened a few. I’m a bit of a contrarian. In 2007 I had associates who were fully invested in equities. When that market downturn occurred their retirement permanently changed, and not for the better. I got burned in the Dot-Com bust and some of my investments never recovered. I know the Bear is out there.
Thanks for pointing out the article. I enjoyed the Morningstar article. I scanned the reference research paper and read the Summary and Conclusions. The study attempts to help answer the very real and important question – “How should a young person/couple just starting in their career invest their retirement savings?”. The study is an analysis of Lifecycle investing, and compares a number of common retirement investment strategies with their “optimal” all equities strategy. The analysis starts at age 25 and proceeds through until death. The authors don’t claim that their suggested portfolio is safe, or perfect. They do say that their results indicate that their recommendation is a bit safer and produces more lifetime spending and a larger inheritance.
I would be careful about using the results of this study if you are in or near retirement. It all hinges on the superiority of equity returns over the long term. That isn’t particularly controversial. I would, however, be cautious in trying to apply these results to someone without the long runway the authors modeled.
Thanks for your excellent analysis of the research paper and identifying who will benefit. If a retiree has enough income (pension, SS, annuity) that substantially exceeds basic expenses, with no need for withdrawals from investments, will this strategy help? Life is uncertain, but I am assuming they still have 15-20 yrs to go.
IMO if you will never need the money you can be very aggressive with investments. But time and inflation could sneak up on you at some point, so caution is advised.
Just to note the article is from Marketwatch; Morningstar has just linked it like they do many. It’s not from Morningstar researchers.
Thanks. I had to search for the research paper and download it.
I would not recommend it. Your plans need to consider risk, as well as needs for income and growth. Annuities are a useful tool, but I don’t see them replacing bonds in a retirement plan.
When planning, we tend to think of steady income needs, but there are large expense surprises in retirement too. You would sacrifice important margin for those, or for market crises. Both will happen over many decades. Bonds act as a critical “air bag” for your portfolio.
We own two joint, lifetime fixed income annuities, part of our plans after work stopped two years ago and I chose to retire. The annuities help bridge the gap to Social Security. They’ll also complement our expected benefits to cover core living expenses, with margin for surprises in Social Security after 2035. But we still hold a mix of bonds in our portfolio, including ones indexed for inflation. Our current stock allocation target is 66%, rising to 76% after our full Social Security benefits begin.
Annuities have two significant risks.
First, the issuer can blow up. It’s rare but has happened, and will almost surely happen again in a future crisis. You can somewhat mitigate this risk by buying from one of the financially strongest companies in the annuity business.
The second risk is from inflation. You can buy fixed income annuities with a set annual cost-of-living adjustment (COLA) but no one today sells an annuity with an inflation-indexed COLA. It sounds like a small thing but in a period of sustained above-average inflation, the gap between your annuity’s COLA, and the current rate of price inflation, will compound to permanently erode the purchasing power of annuity income.
Good luck. I’m with David – 50-45-5 and no interest in changing. At 77 I am just starting to draw on my portfolio, and see no reason to increase my risk.
Thanks for the offer, but no thanks. I’m going to stay with my roughly 50/50 portfolio and am currently working towards my equity holding being just Vanguard Total International (VT) which is currently 65 US/35 international. At 70 we will have enough “guaranteed” Social Security inflation protected income along with my small pension to provide us with just over 90K annul income, enough to cover our basic expenses. At that point will get together with a fee only financial advisor and consider increasing my equity stake of VT significantly.
You meant Vanguard Total World….
https://investor.vanguard.com/investment-products/etfs/profile/vt
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