Best retirement funds for the duration
It's the million-dollar question: What investments should retirees own to avoid running out of money in retirement?
Bankrate ran the numbers and came up with some general answers about the best retirement funds for the duration. But bear in mind: Past results are no guarantee of future returns. Your mileage may vary.
We tested six $1 million retirement portfolios over two time periods. Three portfolios consisted of 60 percent stocks and 40 percent bonds. For the more conservative retiree, we also tested the inverse composition: 40 percent stocks and 60 percent bonds.
|Equity income funds (average performance)||Barclays U.S. Aggregate Bond Index|
|S&P 500 Index||Barclays U.S. Aggregate Bond Index|
|S&P 500 Dividend Aristocrats||Barclays U.S. Aggregate Bond Index|
We asked investment research firm Morningstar to identify funds with equity income characteristics and winnowed the list to the 61 funds with a 20-year track record. These actively managed equity income funds invest in dividend-paying stocks with some potential for growth.
We wanted to see what would happen if a retiree took $40,000 withdrawals annually from these portfolios, increasing withdrawals at a rate of 3 percent per year. These portfolios were tested over a 20-year time frame, from 1994 to 2013.
In a second analysis, we looked at what would have happened to these portfolios if retirement began in 2000, when the stock market had reached a peak and would be poised to put investors through the ringer in the ensuing downdrafts.
In every combination, the Dividend Aristocrats portfolio creamed the competition. This table shows how it shook out.
2013 portfolio balance for retirement beginning in
|Equity income / Barclays U.S. Aggregate Bond Index||$2,294,236||$1,180,051|
|S&P 500 / Barclays U.S. Aggregate Bond Index||$2,664,716||$838,028|
|Dividend Aristocrats / Barclays U.S. Aggregate Bond Index||$3,440,943||$1,795,358|
|Equity income / Barclays U.S. Aggregate Bond Index||$1,936,210||$1,223,324|
|S&P 500 / Barclays U.S. Aggregate Bond Index||$2,187,640||$1,000,469|
|Dividend Aristocrats / Barclays U.S. Aggregate Bond Index||$2,551,959||$1,599,940|
Warning: Performance numbers reflect index performance for the S&P 500, Dividend Aristocrats and bond indexes. In reality, investors cannot invest directly in an index. Performance information was provided by Morningstar.
As you can see, all the portfolios met with success, if success is defined as not running out of money over time despite taking annual withdrawals.
These hypothetical portfolios may have been great yesterday, but tomorrow is another day. Here's why the results turned out the way they did and why they're unlikely to look the same in the future.
Stocks will drive returns; say bye to bonds
The ultra-low interest rates and low inflation of the past five years have tamed the bull market in bonds -- for now and the foreseeable future. Over the past 30 years, bonds contributed significantly to overall portfolio returns through interest income and even capital appreciation. But that kind of performance can't be counted on in the future.
The average 30-year Treasury bond yielded about 3.67 percent in February this year. In 1994, the five-year Treasury yield reached nearly 8 percent. In today's world, finding a unicorn may be more likely than running into similar bond yields.
"It's hard to extrapolate bond returns where you can get 5 percent on a government bond in the future. It's just not possible," says David Blanchett, head of retirement research for Morningstar Investment Management.