Stocks Versus Bonds in Retirement Planning

Smith, Keith V.
August 1997
Journal of Financial Planning;Aug1997, Vol. 10 Issue 4, p87
Academic Journal
This article compares the use of stocks with the use of bonds in retirement planning. For retirement accounts, the usual tax treatment is that neither income nor capital gains are taxed until the investor retires and begins to withdraw his or her funds. All withdrawals are taxed as regular income. For simplicity, it is assumed that investors are prudent and avoid penalties from either early or late withdrawals. The more complex task includes investments in regular investment accounts that are fully taxable. Security income is taxed when earned, and capital gains are taxed when they are realized. To avoid the further question of how portfolio turnover over time causes earlier capital gains taxes, it is assumed that no capital gains are realized until retirement. That is simply a buy-and-hold investment strategy. The major finding of this study is that in contrast to the conventional wisdom, the investor definitely should put bonds in the taxable account and common stocks in the retirement account. The reason for this finding is that the tax-deferred advantage for bonds in the retirement account is easily offset by the tax advantage of growing common, stocks in the retirement account.


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