My fellow Equifax blogger and retirement expert Dan Solin gets a lot of questions about retirement. Lately, the questions he's been hearing most are: What percent of my retirement funds can I safely withdraw without fear of running out of money? How can I generate enough income from my portfolio in this low-interest-rate environment?
Here's the advice he gives people who are concerned about saving enough for retirement in this low interest rate environment:
Understanding the role bonds play in your portfolio is critical to both of these questions. Bonds (including treasuries) should not be viewed as a source of income. Their proper function is to reduce the volatility (risk) of the stock portion of your portfolio and to assist in protecting you against the ravages of inflation.
Your portfolio should consist of globally diversified, high-quality, low-cost stock and bond index funds in an asset allocation appropriate for your investment objectives and tolerance for risk. You can determine your asset allocation by taking the risk capacity survey available on my website.
The fixed-income portion of your portfolio should be limited to bond funds with short and intermediate maturities of five years or less. If you buy bonds with longer maturity dates, you incur “interest rate risk.” If rates rise, the value of your bond holdings will decline.
Short- and intermediate-term bonds act as an inflation hedge, because inflation means higher interest rates. Holders of these bonds are well positioned to take advantage of these rates as their bond funds mature because the funds will reinvest in higher-yielding bonds.
It is only after you have the right portfolio, in an appropriate asset allocation, that you can confront the issue of how much you can withdraw.
The bottom line? Noted financial author William Bernstein said it best: “Two percent is bullet-proof, 3 percent is probably safe, 4 percent is pushing it and, at 5 percent, you’re eating Alpo in your old age.”
For more information, including which bond index funds Dan Solin recommends, see his full blog post at http://retirement.equifax.com/2010/11/running-out-of-money-retirement.html.
Ilyce Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com, The Equifax Personal Finance Blog and CBS Moneywatch She is Chief Content Strategist at RealtyJoin.com, a community for real estate investor