{"id":7732,"date":"2023-10-31T19:17:08","date_gmt":"2023-10-31T19:17:08","guid":{"rendered":"https:\/\/infundpros.com\/markets\/this-ridiculous-100-minus-your-age-rule-could-crush-your-retirement\/"},"modified":"2023-10-31T19:17:10","modified_gmt":"2023-10-31T19:17:10","slug":"this-ridiculous-100-minus-your-age-rule-could-crush-your-retirement","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=7732","title":{"rendered":"This Ridiculous \u2018100 Minus Your Age\u2019 Rule Could Crush Your Retirement"},"content":{"rendered":"
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I hate to see investors get snared by so-called \u201crules of thumb\u201d like the 4% rule (which we\u2019ve debunked here on Contrarian Outlook many times<\/em> before).<\/p>\n

The trouble is, these rules only \u201cwork\u201d until they don\u2019t. And blindly following them through an unexpected market turn could lead you to investment losses, or to run out of money in retirement.<\/p>\n

Heck, some don\u2019t even have a germ of truth to them, like the \u201c100 minus your age\u201d rule, which says you should subtract your age from 100, and that\u2019s how much of your portfolio you should dedicate to stocks. So if you\u2019re 30 years old, 70% should go into stocks and 30% into bonds.<\/p>\n

I\u2019ll be honest: I don\u2019t get this rule. First, it\u2019s worded weirdly. Why not just call it the Bond Age Rule, where your age equals the percentage of your portfolio in bonds? Much easier! Second, I don\u2019t understand the justification for this rule, namely, liquidity.<\/p>\n

Take 2022, for example. I know I don\u2019t have to tell you that it was a lousy year for stocks, with S&P 500 total returns down some 18%.<\/p>\n

As we get older, we have less time to recoup our losses in stocks, so we put more and more of our money into lower-risk bonds so we aren\u2019t forced to sell into a bear market. That\u2019s the logic behind this rule. Trouble is, it doesn\u2019t always work.<\/p>\n

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As you can see in the orange line above, in 2022, a diversified portfolio of long-term US government bonds did even worse <\/em>than stocks.<\/p>\n

So holding Treasuries short-term through something like the iShares 20+ Year Treasury Bond ETF (TLT)<\/strong> doesn\u2019t always give you as much liquidity as you\u2019d like. Sure, you\u2019ll get the 5% yield this fund pays out, but don\u2019t rely on that payout to grow over time, unlike the big growth in stock dividends we\u2019ve seen in the last 20 years.<\/p>\n

Oh, and you\u2019d also have generated lower profits during this stretch, with returns falling in proportion to how much you put in US government bonds and not into stocks.<\/p>\n

Some financial planners say this doesn\u2019t matter because what you really want is liquidity without having to sell into a bear market. And 5% dividends sound good to most folks, who\u2019ve seen Treasuries pay out 2% or less for over a decade. And to be fair, that higher yield does make the lower returns a little less painful to handle if you\u2019re older.<\/p>\n

Except you\u2019re really just putting off the pain, because retirees who diversify into bonds have a higher chance of running out of money in retirement. And the chances of running out of money increase with the percentage of your portfolio you have in US Treasuries.<\/p>\n

To see this in action, we can use the calculator at Firecalc.com to map out the probability of failure. Here\u2019s what happens with a portfolio allocated to 60% long-term US Treasuries and 40% to the S&P 500:<\/p>\n

The success rate here is 71.4% for our assumptions (a retiree starting with $750,000, with a 3-year retirement). Go up to 70% Treasuries and 30% S&P 500 stocks and things get worse.<\/p>\n

Firecalc sees a 55.1% success rate with that asset allocation over 30 years, so at this point you\u2019re basically flipping a coin. That\u2019s an unacceptable gamble with your retirement, just because of an overly simplistic rule of thumb.<\/p>\n

People don\u2019t build houses on \u201crules of thumb\u201d alone, and your financial house should have a better foundation, too. If we stuck with S&P 500 stocks, our success rate would be 87.8% in our scenario. And in many instances, our portfolio sees breakout growth.<\/p>\n

So an S&P 500 focus is clearly the way to go here. But if we buy an index fund like the SPDR S&P 500 ETF Trust (SPY),<\/strong> we\u2019re only getting a 1.5% yield, which means we\u2019ll be forced to sell stocks every year to maintain payouts, getting into the trap of eventually being forced into selling into a bear market.<\/p>\n

Which brings us to a much better option than ETFs: equity-focused closed-end funds (CEFs) that regularly distribute stock profits in the form of regular dividends.<\/p>\n

Funds like the BlackRock Enhanced Capital and Income Fund (CII), Adams Diversified Equity Fund (ADX) <\/strong>and the Columbia Seligman Premium Technology Growth Trust (STK)<\/strong> have provided exactly that for over a decade. I have written bullishly about all three over the years, and two\u2014CII and ADX\u2014have been profitable holds in the portfolio of my CEF Insider <\/em>service. (In fact, we still hold ADX, which has returned 101% since we bought in July 2017, as of this writing.)<\/p>\n

Going back as far as we can (to the inception of the youngest of the three, STK, in other words), we see that these funds have booked a 371% total return over the last 14 years.<\/p>\n

That beats the 174% total return over that same period that a 60\/40 bond\/stock portfolio would get a 60-year-old retiree. And what about liquidity? This trio has you covered.<\/p>\n

ADX has paid a 6.8% yield over this period, on average. CII has paid out 7.3%, and STK has paid out 7.8%. Thus, this portfolio gives us three things:<\/p>\n