When can you skip bonds for retirement?

Question

Conventional wisdom holds that as one approaches retirement, one should transition from holding mostly risky investments (stocks and mutual funds) towards holding more conservative investments (bonds).

This makes sense, since it protects you from a downturn, where the value of your investments drops, but you still need to withdraw a fixed amount to live off.

But it occurred to me that at some point, this transition stops making sense. Someone with a net worth of tens of millions probably does not need to sell off stocks to buy bonds for retirement. Their needs are so much less than the principal, that the amount withdrawn over the course of the downturn would be negligible.

When are you "rich enough" that you can skip bonds when planning for retirement? Is there a rule of thumb, or a framework to think about it?

Answer 1

When are you "rich enough" that you can skip bonds when planning for retirement?

When you can afford to take the worst expected drop in your investments and still be able to draw your required retirement income.

Most people look at retirement as a sort of "savings account" that they pull from periodically. With an ultra-conservative bond portfolio, you might expect to earn 4% with minimal risk. With a more aggressive portfolio, you might make 8% on average, but have some years where you have a 20% drop (in exchange for years with a 30% gain).

The problem with drops is that if, in addition to pulling money out, the market takes say a 20% drop (which it's come close to so far this year), it takes an even bigger rise in the market to make up for that loss. It takes a 25% gain to make up for a 20% loss, so it may take some time to make up for large losses.

On the other hand, if you have $10 million as you mention, then you can take a 20% hit (it will still be emotionally painful) and still have $8 million to draw from. Unless you're drawing tens of thousands a month, you still have plenty of time to recover from that amount of loss.

There's not really a "rule of thumb". A good retirement plan looks at your future expenses, plans for the appropriate amount of draws, calculates how much average return is required, and the corresponding amount or risk you can afford.

So it's not always necessary to go ultra-conservative at retirement - it all depends on how much you have and how much you need (and what level of risk you're emotionally comfortable with).

Answer 2

Questions like this have been addressed by the Trinity study. As seen from the tables there, an all-stock portfolio has a near certainty of lasting 40 years if the initial withdrawal rate (subsequently adjusted for inflation) is 3%. This compares to the classic 4% rule for a balanced portfolio of stocks and bonds. So the answer is, you can skip bonds if your savings are at least ~33x the annual income you need.

Answer 3

As a complement to D Stanley's answer, some retirement calculators allow users to simulate the likelihood of bankruptcy based on your allocation of bonds/stocks/cash.

E.g., https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf:

or with more options https://calculator.ficalc.app/:

https://engaging-data.com/will-money-last-retire-early/:

https://www.ifa.com/calculators/retirement-income/:

Answer 4

This depends on the kind of stock you select to replace some or all of your bonds.

Bonds are all about stability. Even the most stable stock can't match a well rated bond, but some can come closer than others. Consider a stock that has the following attributes:

Extremely low volatility over long time spans. This type of stock draws investors, not short term traders.

Unlikely to go out of business (and will be near the top of any bailout list in a crisis).

and (here's the hard part) Pays a decent dividend. Perhaps 4% or so.

I'm thinking major banks. Banks generally are unexciting in their price movements. Failure of a major bank is generally not in any country's economic interests. Some pay 4% or more dividends.

I'm not making any recommendations. I don't follow the US market very closely and you may be trading on some exchange elsewhere that I've never even heard of. So, I'm just throwing out some food for thought.

Disclaimer: You do realize you are looking at the financial ramblings from a self-proclaimed Escaped Lunatic, right? Even the "perfect" stock can fail. Considering the national debt, I think even US savings bonds might not be a perfect bastion of financial safety. All of my money is invested in physical chocolate bars.

Answer 5

You're trying to optimize exactly backwards.

Assume you're so wealthy that a normal person's retirement is a drop in the bucket for you. Why do you care if it's in the most aggressive investment or stuffed in your mattress earning nothing? The rest of your money is already earning so much that having that extra little bit makes almost no difference at all. Like someone who's only moderately well off might keep 100$ at home just in case, say, a pipe breaks, someone who's really, really rich can keep a couple million in really safe investments just in case the economy collapses.

Additionally, for normal people, micromanaging your money that much can be counterproductive, if you are spending more effort than you're getting back in gains. But if you're really wealthy, managing your investments is already a job and you already have someone who you pay to do that for you...and what are you even paying them for if they can't be bothered to keep exactly the right percentage of your wealth in the right types of investments?

So a rich person may have a much smaller percentage of their total wealth in low risk investments, but a smart rich person probably has a higher absolute value in low risk investments.

(Low risk doesn't even mean bonds here....they already have enough in bonds to cover a normal person's retirement just because of normal diversification. This is more like real estate, etc. Look at Elon even spending money on a plan to survive on Mars just in case the entirety of Earth goes belly up. That's planning for retirement.)

There's a nice website showing "wealth to scale" that may help put it into perspective.