Some say that a 100% equity portfolio can take us all the way through our investing lives.
Is that so?
Maybe.
But it might not be for everyone. And retirement can be different.

This exercise looks at why bonds might matter to a retiree. Using some older ETFs to create portfolios vaguely similar to the modern all-in-one types, we can make the comparisons from further back. Holdings & allocations are in the table below. There are more mixed currencies than metaphors here, but it’ll do for this simple comparison.

ETF Ticker	All-Equity	60/40
SPY (US)	45	27
XIU (Can)	30	18
EFA (Int’l)	25	15
XBB (Bond)	0	30
XSB (Bond)	0	10

Investing $100k in each of these portfolios at the start of 2002 would see the 60/40 grow to about $570k today. Not too shabby, eh? The all-equity portfolio would have grown to almost $860k. A nearly $300k beat. Bonds hurt the 60/40 portfolio’s returns over that timeline. But that’s only the accumulation story.

Now imagine two investors retiring at the start of 2002. They heard that markets only go up, so they wanted to withdraw more than the 4% Rule suggests! They also wanted to “melt down” their registered retirement accounts. These old guys might have been ahead of their time for back then, right?
They started with an 8% withdrawal rate, taking out $8k in the first year. And increased withdrawals every year, roughly in line with inflation.
How did that all work out?

The all-equity retiree ran out of money in 2018. The 60/40 portfolio chugged along for another year. Not huge, but still a win for the portfolio with bonds. In 2009, during the great financial crisis, the 29% portfolio drawdown gave our 60/40 retiree palpitations. But our all-equity guy had supraventricular tachycardia watching his portfolio plummet 50%. Us old people know some fancy medical terms like that! In addition to the 60/40 portfolio surviving longer, it was less gut-wrenching during the bad times.

Let’s look at another retirement scenario. To get back to 2000, we’ll dump the international fund & the Canadian bond funds. We’ll just ignore the international component & replace the two Canadian bonds funds with one American bond fund. The American bond fund slightly underperforms the Canadian combo, but that just makes the comparison favour the all-equity portfolio a little more. The all-equity portfolio now has an allocation of 60% to US equity & 40% to Canadian. That translates to 36% & 24% respectively in the balanced portfolio, with the remaining 40% going to bonds. Now we can look at the impact of the dot-com crash. That was some heavy duty sequence of return risk for anyone retiring back then.

And the result for our 2000 retirees was that …

The all-equity portfolio died in 2010. While the 60/40 carried on ’til 2013. For fun: a portfolio with an even bigger bond allocation of 80% would have survived to 2015. Looking at it another way: when the retiree with the all-equity portfolio went broke in 2010, the 60/40 guy still had almost $25k in his account. And the very conservative 20/80 retiree was looking at almost $47k. Bonds helped a lot here. As it happens, that was during a great era for bonds. It hasn’t been quite so good for bonds in recent years.

Despite today’s lower bond yields, there may still be value in the ability of bonds to tamp down portfolio volatility. That can matter to a retiree. Financially & emotionally. Despite how great the markets have been for the past several years, this exercise is also a reminder that stocks don’t only go up. Stocks are risky. Especially over the shorter timelines that make up retirement decumulation cycles.

Let’s look at one additional scenario that shows how equities can deliver in the good times. Though it muddies the waters still more, it’s important. Same portfolios as in the table above, but with investors retiring in 2010 this time. Both have been withdrawing exactly the same amount every year. The 60/40 retiree checks his portfolio balance today. It sits at just under $50k. Pretty good. However, the all-equity retiree now has a portfolio worth over $150k. Despite identical withdrawals, the all-equity portfolio has continued to grow in value over this timeline. The equity guy is probably having a chuckle at his buddy’s expense. Of course, the RRIF meltdown isn’t going so well for him. He might have to make bigger withdrawals & spend more going forward. How awful for him!
If you have to have a problem in retirement, this might be the one most of us would enjoy complaining about, eh?
As a side note, this period included 2022 where, unusually, bonds fell in concert with stocks. Sometimes, bonds can be risky too!

What does it all mean?

Who knows! There isn’t one solution fit for all investors. But if you go for coffee with the guys that retired in 2000 or 2002, they’ll tell you to include bonds in your portfolio. Spend time with the guys that retired in 2010 & you might find them doing a harder sell on the all-equity approach. We all have biases. These come from who we are & what we’ve lived through. Sometimes, they are shaped by the biases of the people we hang out with. Do you know what your biases are? Biases can be tempered by knowledge. Knowledge is usually a good thing. And while the past doesn’t predict the future, we can learn from it.

In retirement, we’re going into the final stretch of the investment lifecycle. And of our own time on earth. We don’t always have time to wait for a big market recovery. We no longer have the big earning power to make up for large losses either. Downturns can hurt a portfolio a lot more during the decumulation years. We need to assess the different risks of stock & bonds in light of those limitations. Along with our willingness, our ability, & our capability to tolerate those risks.

So how do we handle this? Too big a bond allocation might downgrade the quality of the retirement home we move to at the end. Under different market conditions, the right bond allocation might save us from homelessness. While some investors feel safer having more bond & cash-like funds in the retirement portfolio, they also worry that inflation will evaporate the value of these assets over time. There are other strategies that might help too. Like variable spending, investing for income, annuities, real estate, & so on. These approaches may provide some additional levers to help get us through the journey. But retirement planning is complex. And second guessing is a part of the annual review!

If you can ‘t shake off enough of the uncertainty, it may be worth spending some time & money with a qualified financial advisor or financial planner. A topic for another day!

If you want to learn more about saving & investing, please check out Double Double Your Money, available at your local Amazon store.

Important – this is not investing, tax or legal advice, it is for entertainment & conversation-provoking purposes only. Data may not be accurate. Check the current & historical data carefully at any company’s or provider’s website, particularly where a specific product, stock or fund is mentioned. Opinions are my own & I regularly get things wrong, so do your own due diligence & seek professional advice before investing your money.