“Those broad categories make it easier for clients to see where they can reduce spending to afford something else,” she said. “Some will cut spending on food, entertainment and personal care to offset an increase in housing expenses due to a new home.”
Investing: 60/40 Portfolio
A 60%-40% split between stocks and bonds has long been considered a classic portfolio mix. The idea is that stocks provide growth and bonds provide some stability by zigging when stocks zag.
That hasn’t worked recently. Stocks and bonds are both falling amid the highest inflation in 40 years and interest rate hikes by the Federal Reserve, with markets expecting another jumbo hike of 75 basis points next week. A Bloomberg benchmark that tracks the 60/40 strategy’s performance posted its worst first half since 1988 and is down about 13% this year through Monday’s close.
A Bloomberg survey found many professional and individual investors are still counting on the 60/40 portfolio to beat inflation in the long run, but financial planner Ben Offit of Offit Advisors thinks it’s an outdated concept.
Offit says clients only need to hedge against down markets when they’re close to retiring and drawing on their portfolio. Keeping two to five years worth of expenses in fixed income guards against needing to sell stocks into a down market. The rest of the portfolio goes into equities, and “that has nothing to do with a percentage basis,” he said.
Retirement: 4% Withdrawal
How much can a retiree safely withdraw from savings annually? The 4% rule — from a 1994 study based on a conservative, low-fee portfolio — says if a retiree withdraws 4% in their first year, and adjusts that for inflation every year after that, their money has good odds of lasting 30 years.
The rule may be particularly ill-suited for current retirees, with expectations that market returns will be subpar for a prolonged period and inflation will remain elevated. Some personal finance experts say it should be more like a 2.5% or 3% rule.
An alternative is “dynamic” withdrawals, where after a year of bad returns retirees take out less so a nest egg isn’t badly eroded by selling into a down market; in a good year, they take out more.
The bottom line: “Rules of thumb can be great starting points,” said Christine Benz, Morningstar’s director of personal finance. “But they’re just that — starting points.” If someone wants to consider the 4% rule, that’s fine, she said, “but they should think about other dimensions of that: What’s the composition of their portfolio, how do they actually expect to spend in retirement, and so on.”
This article was provided by Bloomberg News.