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Conventional wisdom holds that as one approaches retirement, one should transition from holding mostly risky investments (stocks and mutual funds) towards holding more conservative investments (bonds).

This makes sense, since it protects you from a downturn, where the value of your investments drops, but you still need to withdraw a fixed amount to live off.

But it occurred to me that at some point, this transition stops making sense. Someone with a net worth of tens of millions probably does not need to sell off stocks to buy bonds for retirement. Their needs are so much less than the principal, that the amount withdrawn over the course of the downturn would be negligible.

When are you "rich enough" that you can skip bonds when planning for retirement? Is there a rule of thumb, or a framework to think about it?

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    Money cannot (or at least can only partially) buy you the years you might need to wait to recover from an extended downturn. I guess the question is whether your goal is to spend most of your money (in which case you may want to minimise the risk involved with a downturn) or to pass most of it to your loved ones (in which case sufficient wealth would mean you probably don't care so much about a downturn). Do keep the possibility in mind of a downturn plus huge unexpected expenses (e.g. medical - very relevant to the US, at least). That can eat large amounts of one's savings very quickly.
    – NotThatGuy
    Feb 2, 2022 at 16:25
  • You are rich enough when having several years of cash on hand is a small enough fraction of your net worth to not worry about it.
    – Jon Custer
    Feb 3, 2022 at 17:29
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    @NotThatGuy "Money cannot (or at least can only partially) buy you the years you might need to wait to recover..." -- I don't follow. The meaning of "recover" here is to get back your money, so of course having more money can compensate. I'd much rather have $10M and be fully exposed to market downturns than have $1M and be fully protected from them.
    – nanoman
    Feb 3, 2022 at 22:41
  • @nanoman If you have a risky $10M and the market plummets into a multi-year recession, you're not going to have anywhere near $10M again any time soon. So instead of having basically the entire $9M that you put into a lower-risk investment when you were close to retirement, you now only have $5M for the rest of your life. $9M > $5M. I don't know where you got $10M and $1M - if you put your $1M into a more risky (but responsible) investment when close to retirement, you're very unlikely to ever see that reach $10M. And if you're hit by the above recession at the start, you'd only have $500k.
    – NotThatGuy
    Feb 4, 2022 at 0:27
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    @NotThatGuy Perhaps I misunderstood your point. OP asked, in effect, "How much more money would I need to maintain my retirement security while being fully exposed to the stock market?" and you seemed to be saying, "No amount is enough, so there is no valid answer." I made up $1M and $10M as reductio ad absurdum. Whatever degree of security I have for my retirement needs with $1M invested in an optimal balanced way, I would have more security if I could instead have $10M but be forced to put it 100% in stocks. I figured this would be obvious. So the answer must be less than 10x more.
    – nanoman
    Feb 4, 2022 at 0:44

5 Answers 5

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When are you "rich enough" that you can skip bonds when planning for retirement?

When you can afford to take the worst expected drop in your investments and still be able to draw your required retirement income.

Most people look at retirement as a sort of "savings account" that they pull from periodically. With an ultra-conservative bond portfolio, you might expect to earn 4% with minimal risk. With a more aggressive portfolio, you might make 8% on average, but have some years where you have a 20% drop (in exchange for years with a 30% gain).

The problem with drops is that if, in addition to pulling money out, the market takes say a 20% drop (which it's come close to so far this year), it takes an even bigger rise in the market to make up for that loss. It takes a 25% gain to make up for a 20% loss, so it may take some time to make up for large losses.

On the other hand, if you have $10 million as you mention, then you can take a 20% hit (it will still be emotionally painful) and still have $8 million to draw from. Unless you're drawing tens of thousands a month, you still have plenty of time to recover from that amount of loss.

There's not really a "rule of thumb". A good retirement plan looks at your future expenses, plans for the appropriate amount of draws, calculates how much average return is required, and the corresponding amount or risk you can afford.

So it's not always necessary to go ultra-conservative at retirement - it all depends on how much you have and how much you need (and what level of risk you're emotionally comfortable with).

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    This is roughly what I was thinking (+1). But I do think we can come up with a rule of thumb. My initial take was: the Great Recession was a 40% drop in the market, and it's likely the "worst case" for my life (I hope) - if your nest is is at least 40% larger than the minimum you need to retire, you can stay all-in on stocks. So using the 4% rule, you'd normally need 1.25M to have an income of $50,000 a year. To stay all-in on stocks, you'd need at least 40% more, or 1.75M.
    – codeMonkey
    Feb 2, 2022 at 13:19
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    @codeMonkey Almost - a 40% drop requires a 66% gain to make up for it. Taking a 40% hit on $1.75M only leaves you with $1.05M, which is insufficient for the expected withdrawal and interest rate. You'd need $2.08M to be left with $1.25M after a 40% drop (66% more than the required amount, not 40% more).
    – Nuclear Hoagie
    Feb 2, 2022 at 15:31
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    I markets drop sharply the valuation drops just as well. Therefore the same withdrawal rate (e.g. 4%) is a lot more conservative than with high valuations. They may both be 4%, but the expected forward return is totally different in those scenarios
    – Manziel
    Feb 2, 2022 at 15:37
  • @NuclearHoagie - great point! This is why I wanted a reality check.
    – codeMonkey
    Feb 2, 2022 at 16:08
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    @NuclearHoagie Another way of thinking about it: you'd need an extra 40% on top of the $1.75, so that's an extra $0.7. But if the market drops 40%, then you'd lose not only 40% of the $1.75, but also 40% of the $0.7M, which is $0.28M. So you'd need an extra $0.28M to cover that, but then you'd need 40% of $0.28M, and so on. See youtube.com/watch?v=3cNdM7W0VlQ
    – Acccumulation
    Feb 4, 2022 at 17:36
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Questions like this have been addressed by the Trinity study. As seen from the tables there, an all-stock portfolio has a near certainty of lasting 40 years if the initial withdrawal rate (subsequently adjusted for inflation) is 3%. This compares to the classic 4% rule for a balanced portfolio of stocks and bonds. So the answer is, you can skip bonds if your savings are at least ~33x the annual income you need.

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    This lines up well with the "40% more than the minimum nest egg" metric I proposed in my comment on D Stanley's answer.
    – codeMonkey
    Feb 2, 2022 at 13:21
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As a complement to D Stanley's answer, some retirement calculators allow users to simulate the likelihood of bankruptcy based on your allocation of bonds/stocks/cash.

E.g., https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf:

enter image description here

or with more options https://calculator.ficalc.app/:

enter image description here

https://engaging-data.com/will-money-last-retire-early/:

enter image description here

https://www.ifa.com/calculators/retirement-income/:

enter image description here

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This depends on the kind of stock you select to replace some or all of your bonds.

Bonds are all about stability. Even the most stable stock can't match a well rated bond, but some can come closer than others. Consider a stock that has the following attributes:

Extremely low volatility over long time spans. This type of stock draws investors, not short term traders.

Unlikely to go out of business (and will be near the top of any bailout list in a crisis).

and (here's the hard part) Pays a decent dividend. Perhaps 4% or so.

I'm thinking major banks. Banks generally are unexciting in their price movements. Failure of a major bank is generally not in any country's economic interests. Some pay 4% or more dividends.

I'm not making any recommendations. I don't follow the US market very closely and you may be trading on some exchange elsewhere that I've never even heard of. So, I'm just throwing out some food for thought.

Disclaimer: You do realize you are looking at the financial ramblings from a self-proclaimed Escaped Lunatic, right? Even the "perfect" stock can fail. Considering the national debt, I think even US savings bonds might not be a perfect bastion of financial safety. All of my money is invested in physical chocolate bars.

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  • But what happens when global warming melts your investments... What then?!?
    – Nosjack
    Feb 2, 2022 at 15:18
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    @Nosjack - Oops. I didn't think of that. 😭 I guess I'll have to pack up my chocolate supply and move somewhere much further north.
    – Escaped Lunatic
    Feb 2, 2022 at 15:21
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    Implying one should be stock-picking in the first place! (One should not. Investing is not a battle of wits with the next guy, it's using the laws of large numbers to diminish risk. Stock picking is plain gambling.)
    – Harper - Reinstate Monica
    Feb 3, 2022 at 0:33
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    @EscapedLunatic Not to be rude, but you aren't Warren Buffett. You don't have the knowledge, connections or research staff. Even professional stock pickers who have that cannot beat the market by more than their expenses.
    – Harper - Reinstate Monica
    Feb 3, 2022 at 18:20
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    @Harper-ReinstateMonica - I know I'm not Warren Buffett, but that doesn't render me incapable of applying some of his most basic long term investment concepts to a question like this one. No matter how great someone else's resources are, if they are only looking for a short or even medium term for high returns, they're much more vulnerable to market swings than someone looking for modest steady returns (in price or through dividends) over very long periods. If someone wants even less risk, bonds are still an option.
    – Escaped Lunatic
    Feb 4, 2022 at 10:14
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You're trying to optimize exactly backwards.

Assume you're so wealthy that a normal person's retirement is a drop in the bucket for you. Why do you care if it's in the most aggressive investment or stuffed in your mattress earning nothing? The rest of your money is already earning so much that having that extra little bit makes almost no difference at all. Like someone who's only moderately well off might keep 100$ at home just in case, say, a pipe breaks, someone who's really, really rich can keep a couple million in really safe investments just in case the economy collapses.

Additionally, for normal people, micromanaging your money that much can be counterproductive, if you are spending more effort than you're getting back in gains. But if you're really wealthy, managing your investments is already a job and you already have someone who you pay to do that for you...and what are you even paying them for if they can't be bothered to keep exactly the right percentage of your wealth in the right types of investments?

So a rich person may have a much smaller percentage of their total wealth in low risk investments, but a smart rich person probably has a higher absolute value in low risk investments.

(Low risk doesn't even mean bonds here....they already have enough in bonds to cover a normal person's retirement just because of normal diversification. This is more like real estate, etc. Look at Elon even spending money on a plan to survive on Mars just in case the entirety of Earth goes belly up. That's planning for retirement.)

There's a nice website showing "wealth to scale" that may help put it into perspective.

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