When Does a Bonds-First Withdrawal Sequence Extend Portfolio Longevity?

Weigand, Robert A.; Irons, Robert
November 2008
Journal of Financial Planning;Nov/Dec2008, Vol. 21 Issue 11, p66
Academic Journal
• This paper explores the effect of the withdrawal sequencing decision on the longevity of retirees' portfolios by comparing the strategy of consuming bond assets first with two other strategies: consuming stocks first, and maintaining a 50/50 stock/bond portfolio. • We find that consuming bonds first extends investor portfolios 90 percent of the time over the other methods. However investors who consume bonds first transition to the riskiest portfolios, with significantly higher annual volatility than the alternative strategies. • We find that by considering the current spread of stock yields (the E/P ratio, the reciprocal of the market P/E) over bond yields, practitioners can identify a market signal that reliably forecasts when a bonds-first strategy will produce the largest gains. The advantage of bonds-first increases when the spread is in the highest historical quintile the first year of retirement. When the spread is in its lowest historical quintile, however, bonds-first barely beats stocks-first. The current spread of stocks' long-term earnings yield over bond yields is less than 1 percent, indicating that the expected return on U.S. stocks and the equity risk premium are near historical Iows. The signal indicates that for retirees in 2008, taking on the increased volatility of the bonds-first strategy is not worth it," as the strategy is unlikely to result in the same extension of portfolio longevity as it has historically.


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