The key here is about finding the balance between living a reasonable lifestyle before and after retirement as well as avoiding the extremes being 80, Cenegenics commercial-healthy and out of money versus dying with $20 million in the bank unspent.
In a recent blog post about withdrawal rates I made the following comment;
For a little context of my own, a 4% withdrawal rate invested in cash at zero percent will last 25 years. That is not a recommendation obviously as 4% of $X in 2040 would be worth a lot less than today (could easily be a 50% inflation haircut) but that point has helped conversationally to make the point.
This got me to thinking about a portfolio idea put forth a while back by Zvi Bodie that we’ve discussed here a few times. You can read more here but basically he believes that you should have as little of your money in risk assets as possible. He likes the idea of 90% in TIPS and the rest in risk assets but that you should be prepared to lose that 10%. The link above explores why losing the entire 10% is unrealistic but that is what Bodie thinks (or thought previously anyway).
The upside to have a lot less in risk assets is there is far less chance of suffering a meaningful impairment of capital and the downside is that a whole lot more money needs to be saved…probably. Building on examples that we’ve studied before; a couple living a $60,000 lifestyle that will get a combined $40,000 from Social Security that has accumulated $1.6 million in assets may not need 60% in risk assets (and anymore the term risk assets might apply to the bond market too). They probably need some exposure but may not 60% and from Bodie’s viewpoint, inflation risk should be mitigated by the TIPs exposure. There are also funds that will take off risk exposure in a systematic way and funds that do this are likely to proliferate as a way to manage exposure to risk assets.
A crucial component of retirement planning is determining the proper asset allocation which includes allowing for the possibility of being ahead of the game and allocating accordingly just as should be done when behind the game.