Stock/Bond Combo Is Best for Higher Retirement Spending: Morningstar

For advisors, or their clients, who might be nervous about having too much retirement savings in stocks — believing the end is near — there’s another option that Morningstar Vice President of Research John Rekenthaler covers in his recent column “Asset Allocation for Retirees: What Will the Future Bring?”

The answer: A good old-fashioned blended portfolio may provide the best safe withdrawal rate option.

Rekenthaler has discussed the virtues of a heavily weighted stock portfolio in retirement by looking at the history of stock returns.

“History’s lesson is straightforward: the more stocks, the merrier. Investing entirely in equities consistently generated either the highest safe spending rate for a given 30-year period or a rate that wasn’t far off the mark. What’s more, all-equity portfolios were much likelier to deliver a happy surprise than to disappoint,” he states in his column “ Better Stocks Than Bonds in Retirement.”

An Alternative View

Yet there’s a caveat, “The precept of ‘the more stocks the better’ assumes that the future will look something like the past.”

Further, he says the “better stocks” study has a small sample size (three independent 30-year periods spanning a century), and “stocks have become unusually costly. History may thus prove an unreliable guide.”

He also points out the equity forecasters at Morningstar believe that “the next 30 years’ stock returns are muted.”

But are bonds, which they also expect to have weak performance, the answer? In fact, despite “muted” equity returns, Morningstar’s real annualized 30-year returns projected for 2021 for stocks is 4.58% while for bonds is 0.18%.

That said, stocks, too, are in a precarious position, as he notes, “I realized that stocks have recorded 5% real annualized gains over several 20-year periods, including from 2000 through 2019. So, it scarcely seems unreasonable to believe that they could do so for the next 30 years.”