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Balanced Portfolio for Retirement

© Kirk Lindstrom

When you are retired, you want an investment portfolio that meets your income needs while keeping up with inflation. This article explores how my suggested 50:50 portfolio does in a terrible bear market.

Investorwords defines a "balanced investment strategy" as:

A method of portfolio allocation designed to provide both income and capital appreciation while avoiding excessive risk.

Allocation Rule of Thumb

I like this simple "rule of thumb" that says your percentage of assets in stocks should be 110% less your age in years. Thus someone 60 yrs old would have 50% in equities and 50% in fixed income. At 80 years of age, the total in equities will drop to 30%. There will be as many allocation strategies as grains on sand on the beach, but the above one is easy and widely accepted.

Those with a high tolerance to portfolio fluctuation get the best risk adjusted return with 80% in equities no matter what age they are, but it requires a strong stomach to stay the course and not sell in bear markets. You get much of your income from selling equities every year. One's tolerance to risk usually decreases with age so the rule of thumb works well for most.

One Million Dollar Balanced Portfolio

Lets say you have $1M split 50:50 between the total stock market (Vanguard's VTSMX or Vipers are good choices for low cost) and Vanguard's Total Bond Fund (VBMFX).

Currently, VTSMX is paying a 1.28% annual dividend and might appreciate 8% a year. VBMFX is paying 5.68% but won't appreciate unless interest rates go lower (you will also see depreciation if rates go up but over long periods of time, consider rates flat as it is the income that matters).

Thus, our hypothetical $1M, 50:50 portfolio will pay annual income of:

$500,000 x 0.0128 = $6,400
$500,000 x 0.0568 = $28,400

for a total of $34,800 a year in annual income.

If the equity portion goes up 8% ($40,000), then you can sell half at the end of the year to rebalance back to 50:50 and have an annual income of: :

$520,000 x 0.0128 = $6,656
$520,000 x 0.0568 = $29,563

for a total of $36,219 a year in annual income, an increase of 4%.

Bear Market Reality

The above is all fine and good in "normal markets" where we get 5 or 6% from bonds and see 8% or more in stock appreciation when inflation is 4% or less. As long as those are met, the above portfolio will do great. You could even "annuatize" the portfolio to provide more income (draw it down to zero at your death so you die bouncing your last property tax payment that is in the mail).

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