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By Steve Butler, Founder & CEO (


Retirement Income’s Simple Solution

Baby boomers who have remained in stocks since the crash have benefited from the rising tide of the markets, creating for many an addiction to “status quo bias.” This is the inability to actually pull the trigger and make a change in investment strategy. Why?  Studies in behavioral economics show that we get really annoyed if we make an investment change that turns out to be a bad decision.  By comparison, if we make no decision and the same or worse outcome results from our inertia, it just doesn’t bother us as much. We shrug off the “shoulda, coulda, woulda” factor.  But, the fear of “doing something stupid” carries more weight and leaves us frozen like a deer in the headlights.

Meanwhile, the stock market is once again at an all-time high, which offers yet another chance to take some chips off the table — a chance we missed last year and earlier this year at comparable market highs. Since the market routinely loses 10% or more at least once in the course of any year, it could be timely to make our move now.  Recognize the fact that when mini-panics cause stock values to drop, bond values go up.  This explains why, a 50/50 combination of stocks and bonds will typically lose about half of what stocks suffer in a typical mini, or even major, collapse.

A balanced mutual fund with a low expense ratio offers one of the simplest, most cost-effective tools for generating income and protecting principal.  Most, however, tend to be weighted with two-thirds in stocks and only one-third in bonds.  This typical combination produces about 9% average annual returns thanks to the 10% long-term return of the heavier stock component.  Balanced funds lean toward more stocks largely because “everybody else does,” and because the average buyer’s choice is predicated on upside performance rather than on downside protection and consistency.

Once in retirement, however, the objective is different. Retirees are depending on cash flow to pay bills, and they never want to run out of money. A 50/50 stock/bond allocation makes better sense thanks to far more consistent results and much greater protection in a market slide. The long-term average annual rate of return hovers in the 7.5% range.

Of that 7.5% annual return, someone with, say, $300,000 (IRA, home sale, inheritance, savings, etc.) might wish to generate spendable cash flow of 6% — $18,000 per year, which could be $1,500 automatic monthly deposits — just like their social security checks. This leaves an extra 1.5% (of the 7.5% total) in the account to grow the balance and offset inflation.  Unlike an annuity, all or a portion of the account can be deposited into the same checking account at any time with no fees or penalties.

To create a 50/50 mix, start with a typical balanced fund (two-thirds in stocks) and mix it with a pure bond fund.  A 70/30 combination in dollars of the balance and the bond fund will produce a 50/50 mix of stocks and bonds.  Furthermore, of the 6% return, at least half will come from a combination of interest on the bonds and dividends on the stocks. The other 3% will come from some of the capital gains on the half still invested in stocks.  Nothing is guaranteed, of course, but history suggests that it’s a pretty safe bet.



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