Are Bonds a Bad Idea For Your Retirement Nest Egg?

Old peopleTwo weeks ago, the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds delivered its 2013 annual report to Congress. The report was intended to inform Congress about the current state of the Old-Age, Survivors, and Disability Insurance (“OASDI”) and the Disability Insurance (“DI”) programs, and projects forward to the best of its abilities the health of the programs in the future. These programs fall under the umbrella of Social Security.

The 2013 report confirmed the findings of the 2012 report, and vindicated the position of many policymakers and a majority of the American population. Chiefly: there is a problem facing Social Security. To be dramatic about it, although the language of the report is modest, a crisis is brewing –  Social Security is only expected to be able to meet all of its obligations through 2033 (you can read more about the report here).

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Social Security is intended to compliment, not replace, individual retirement planning. Unfortunately, reports indicate that 53 percent of married couples and 74 percent of unmarried retirees receive at least 50 percent of their income from Social Security, while nearly 25 percent of married couples and nearly 50 percent of unmarried retirees rely on Social Security for 90 percent of income.

Part of the reason Social Security has become such an essential part of retirement for so many people is that in aggregate Americans have failed to save enough. But even for those who have, record low interest rates and uncertain market conditions have created an environment where a problematically high number of retirees risk draining their portfolio.

An analysis done by AllianceBertstein for the New York Times showed that thanks to record low interest rates, even retirees with a portfolio of $1 million — something only 1 in 10 have access to — invested in bonds have a 72 percent chance of running out of money before they die. This, of course, turns the traditional advice of investing more heavily in bonds as you near retirement on its head.

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Retirement Risks of Bonds - Graphic - NYTimes.com

Source: AllianceBernstein, The New York Times

At a glance, it’s easy to see that maintaining a portfolio that is weighted toward stocks dramatically reduces the likely hood of exhausting a portfolio before death.

Here’s how the main markets traded on Monday:

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