In recent times, there has been a trend among retirees to move their savings into T-bills due to the appeal of safety and the relatively high yield they offer. This movement, known as T-bill and Chill, has gained popularity especially as T-bills currently offer a yield of more than 5%, exceeding the traditional 4% rule for retirement spending. However, while T-bills are considered one of the safest investments in the world, it is important for retirees to consider the risks of removing stocks from their retirement portfolios.
Retirement is a long-term endeavor, often lasting for 30 years or more, and retirees need to plan for the possibility of living well into their 90s or even 100s. Despite the monthly withdrawals retirees make from their savings to cover expenses, it is important for them to maintain a long-term perspective as investors. By viewing themselves as long-term investors, retirees can better prepare for market fluctuations and ensure that their investments outpace inflation, thus safeguarding the value of their savings.
While T-bills may offer a sense of security, historical data shows that over a 30-year period, stock returns have outpaced the returns of T-bills significantly. Stocks have returned twice as much as T-bills since 1977, with an average return of 9.80% compared to 3.34% for T-bills since 1928. Despite the volatility of stock prices, a well-diversified portfolio of stocks and bonds can help retirees weather market fluctuations and potentially achieve higher returns over the long term.
The risk of inflation eroding the value of bonds is a significant concern for retirees, as the price of goods and services can rise significantly over a 30-year period. To combat inflation, retirees need to invest a portion of their savings in assets that outpace the rise in prices. Stocks have historically outpaced inflation over the long term, making them a valuable addition to a retiree’s portfolio. Additionally, retirees can consider investing in TIPS, or Treasury Inflation-Protected Securities, to hedge against inflation risk.
As retirees approach and enter retirement, it is generally recommended that they reduce their exposure to stocks and increase their allocation to fixed income. This transition, known as the glide path, reflects the changing needs of retirees as they shift from saving for retirement to taking distributions from their savings. The optimal allocation to stocks versus bonds will vary for each retiree based on their individual circumstances, with the 60/40 portfolio being a popular option for many retirees.
While there may be circumstances where a retiree does not need to invest in stocks, such as relying solely on Social Security benefits or nearing the end of their life, the long-term outperformance of stocks over bonds suggests that maintaining some exposure to stocks may be beneficial for retirees. Estate planning considerations may also influence a retiree’s decision to include stocks in their portfolio. Ultimately, the best portfolio for any retiree will depend on their specific financial goals and risk tolerance.
