Sunday, October 20

Week 120 - $150/wk for a Retirement Fund

Situation: You’ve heard a lot about saving for retirement, and you’ve probably heard that Social Security plus your workplace retirement plan probably won’t get you to a comfortable retirement any more. Why? Because people only reduce their spending by 15% after they retire, which means you will need a private savings plan to make up for the lost income. This savings plan can take the form of an IRA, payments into a low-cost annuity, proceeds from the sale of your home (if you move to smaller quarters), or perhaps even gold you’ve hidden away, and other choices. But when retirement is more than 5 years in the future, stocks remain your best bet.

We recommend that you minimize costs by using a stock index fund backed by a bond index fund. The Vanguard Balanced Index Fund (VBINX) provides both in one package, allocated 60% to stocks and 40% to bonds (see Table). It is rebalanced daily, so you won’t get burned if a stock market bubble bursts. (Most of those stock gains would already have been converted to bonds as part of daily rebalancing, and bonds typically increase in value when stocks crash.) Or, you can choose a low-cost managed fund that uses an excess of bonds to balance both the inherent risk of stocks and the difficulty managers have of knowing when to move away from stocks and into bonds. The Vanguard Wellesley Income Fund (VWINX) has the best record. It is bond-heavy and therefore has less volatility than VBINX but performs about as well. The third low-cost option is to study the markets yourself and invest in stocks online at computershare, and in bonds at treasurydirect. This third option allows you to pick only the most stable stocks and bonds. That hedging strategy will serve you well, even though it has less exposure to growth themes.

Why do we harp on buying and selling costs? Aside from “impulse buying”, the main reason retail investors make only half as much as they should (based on whatever asset allocations they’ve chosen) is their failure to control costs. (Company CEOs are no different.) It’s a human failing to like toys and spend too much for those. But retirement is dead serious. You won’t like it if you haven’t prepared your body, mind, and pocketbook ahead of time.
Our blog this week details one example of a personal retirement fund (mine). I dollar-average into 6 stocks and one bond (see Table). There are two Lifeboat Stocks (Week 106): Procter & Gamble (PG) and NextEra Energy (NEE), and two Core Holdings (Week 102): International Business Machines (IBM) and Nike (NKE). The remaining two stocks are Exxon Mobil (XOM) and Microsoft (MSFT), both of which have AAA credit ratings to make up for the fact that they don’t quite meet our standards for designation as Core Holdings. 

In our Week 117 blog on hedge stocks, we identified 16 such stocks out of the 900 in the S&P 500 and S&P 400 mid-cap indexes. NextEra Energy (NEE) was one of those, meaning that an investment in NEE stock doesn’t need to be backed up with investment in a Treasury Note or a bond index fund. The “bonds” that I use to back up the $250 that I invest each month in the other 5 stocks are inflation-protected 10-yr US Treasury Notes ($750/qtr).

In the Table, we use red highlights to denote values that are lower than benchmark values (VBINX). All values are current through 10/18/13.

Bottom Line: Dividend Reinvestment Plans (DRIPs) take time to set up and sell but are on automatic pilot the rest of the time. Savings Bonds and Treasury Notes are even easier to manage (through treasurydirect), except that you have to remember to buy them. The key difficulty is deciding exactly which stocks you’d like to own for an extended period. If you want to eliminate that chore without incurring additional expense, it is best to take Warren Buffett’s advice and invest in low cost index funds. 

This week’s blog shows one example of how you can build retirement savings with DRIPs for stocks issued by 6 highly rated and stable companies, balanced with inflation-protected 10-yr Treasury Notes. You can have your accountant designate up to $6500/yr as a standard IRA or Roth IRA.

Risk Rating: 4

Post questions and comments in the box below or send email to:

No comments:

Post a Comment

Thanks for visiting our blog! Leave comments and feedback here: