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June 28, 2008


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If half of your expenses are covered by dividends, then only half as much need be invested in fixed income.

The best measure of fixed returns are initial returns, not historical ones. With the 10 year treasury at 4% and inflation at 4% the real return can be expected to be 0%. Corporates may yield another 1%.

But Dave Ramsey says we can bet on 12% returns from the stock market and can withdraw 8%, thus never losing principal, inflation-adjusted. ;) And he implies that you can stay fully invested in stocks forever with no bond fund allocation.

It drives me crazy every time I hear him tell people that! He really needs to back off of those rosy assumptions. He's going to lead some people to really blow it.

So, if at any point in time during retirement we should have at least 5-7 years of projected spending in fixed income investments, does that include balanced funds?

If I have a portfolio of 60/40 stocks/bonds and the 40% is at least as large as my projected spending for the next 5-7 years does that meet your suggested amount of money in "fixed income"?

Regarding allocating the next 5 - 7 years of living expenses to fixed-income investments during retirement -- Back in 2004, Dave Braze explained in easy-to-understand detail this very same strategy, and went even further by providing a couple of charts to show how he does it. The article is titled "Creating a Comfy Income Cushion." Back then, I thought it was such a great idea that I saved the article and have been following the same plan ever since. It has made investing and portfolio allocation much less stressful. Here's the link:

The other thing to consider is if you will have pension income, social security income, or hobby income during retirement to supplement this income.

I think the article misses 2 points. #1 - I think your personal inflation rate can be much lower than the assumed 3%, especially if you retire before 62. In my case when I reach 62 I'll start receiving social security. At 65 I will start getting medicare. These 2 items will have a large effect on my withdrawal rates. #2 - If you have enough money to put all your money in CD's and live off the principal and interest until your 100, then you don't need any money in stock. Maybe you don't have that much but you may have 15 yrs worth in CD's and the balance in stocks. The point is that there is no need to risk money in the stock market if you don't have to.

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