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Financially Speaking

The Great Stock vs. Bond Debate

How to set up a retirement-investment plan that pays the bills

En español | I have a radical thought. How about not investing for growth in the years just before retirement, and even after? Instead, think about investing in ways that make sure you can pay your bills. That means putting more money into fixed income assets and less into stocks.

See also: Should you stick with stocks?

Eggs labeled growth or income to symbolize investing in stocks or bonds

Invest less money in stocks to have a large nest egg. — Photo by: Renee Comet

That's not the usual advice. A majority of us retiring now (or soon) will live well into our 80s. Many will nudge the 100-year mark. Over so long a period, stocks are likely to rise substantially. That's why you're usually told to keep your stock allocation high at age 55 or 65 — say, half of your retirement savings (or more), with the rest in bonds. If all goes well, you'll wind up with a larger nest egg. The money should last for life if you spend no more than 4 percent of the total in your first retirement year, plus an increase to cover inflation in each following year.

But, but, but … what if you were 50 percent in stocks and retired in January 2000 just before the market crash? Or retired in 2008 when the economy almost went down the drain? The 4 percent withdrawal rule still might work, if you're highly disciplined. Still, it's iffy. And let's face it — you might have sold during the price plunge, to preserve what you had left. That's kissing the growth you'd hoped for goodbye.

You're most likely to cut and run if you depend on your savings to cover the monthly bills. For that reason, an increasing number of financial advisers think your first priority should be creating a steady income. For example, you might arrange for monthly withdrawals from a mix of mutual funds invested in bonds. Later, you'd add immediate-pay annuities. Top it off with a smaller layer of stocks, for future income growth.

You should start your move toward bond funds five years before your retirement date, says Jeff Maggioncalda, president and CEO of Financial Engines, which manages 401(k) accounts for corporate employees. FE's new Income+ program works with just 20 percent in stocks.

Josh Cohen of Russell Investments thinks you should hold about 30 percent in stocks when you retire, with the rest in diversified bonds. Follow the 4 percent rule on withdrawals. That gives you the same annual income you'd get from a more aggressive fund but with less risk, he says.

Zvi Bodie, professor at Boston University School of Management and author of Worry-Free Investing, plumps for holding the bulk of your money in Treasury inflation-protected securities — again, with a small amount in diversified U.S. and international stocks.

Next: Save enough money while you're still employed. >>

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