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5 Best Retirement Calculators and Planners (#1 is Free)

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Retirement calculators can help us plan and prepare to retire. When we are years away, these online tools can help us determine how much we should be saving. As we approach our time to retire, they can help us understand how much we can spend each year and which accounts should fund that spending.

Not all retirement tools, however, reach the same result. They take different approaches to what is a complex series of calculations and assumptions. One study examined five popular retirement planning software packages and found stark differences in outcomes. As a result, it recommended that individuals use “multiple programs before implementing an action plan based on the results.”

To that end, here is a list of the best retirement calculators, planners and software tools.

Best Retirement Calculators

What follows are my top 5 pics. The first three are retirement planners, allowing you to enter detailed information about your finances both before and after retirement. The final two options are more of retirement calculators. The inputs are much more limited, but these tools give you a quick estimate of when you can retire.

1. Personal Capital

Best all around retirement planner

Personal Capital is my favorite investing and retirement tool. In addition to being totally free, it’s extremely easy to use and rich in features. Once a user connects their 401k, IRA and other investment accounts, Personal Capital pulls all the data from the accounts into its Retirement Planner.

Personal Finance Retirement Planner

The Retirement Planner then allows users to model both income events (e.g., savings, sale of real estate, social security, pensions) and spending goals (e.g., retirement spending, travel, education). Users can also set up multiple scenarios to compare, such as retiring at different ages. Personal Capital then runs the data through a Monte Carlo simulation and reports the likelihood of the plan’s success.

Unique Feature: Users can create multiple scenarios (e.g., different retirement dates, different social security strategies) and compare how successful each will be.

Try Personal Capital

2. New Retirement

Most detailed retirement analysis

New Retirement is not for the faint of heart. The tool, which has both a free and paid version, enables users to model just about every aspect of retirement. For example, users can model social security claiming strategies, medicare coverage, annuities and pensions.

New Retirement Planner Dashboard

New Retirement handles the complexity of retirement planning in two ways. First, users can follow a quick start guide, answer a few simple questions, and have a complete snapshot of their retirement readiness in under five months.

Following that, users can dive into the details of everything from future healthcare costs to retirement savings contributions. New Retirement enables users to link investment and retirement accounts or enter them manually.

New Retirement offers three plans ranging in cost from free to $396 a year.

Unique Feature: New Retirement includes a Roth IRA conversion calculator to help users determine when and how much of a traditional IRA should be converted to a Roth IRA.

Try New Retirement

3. OnTrajectory

OnTrajectory is quickly becoming one of my favorite retirement planners. Like New Retirement, it allows you to map out just about everything related to both saving for retirement and spending during your golden years.

OnTrajectory Retirement Planner

It takes just seconds to get started. You’ll answer a few questions, and OnTrajectory will set up a projection of your future savings and spending. From there you can begin to enter data to fine tune every aspect of the plan.

The tool is divided into three sections–Income, Expenses and Accounts. You can link your accounts so they automatically update, or you can enter balances manually. For income, the tool accommodates everything from work to pensions to rental properties. Expenses include every type of expense imaginable, and you can group expenses to make reporting easier.

As for accounts, you can link or manually create 401k, IRA, HSA and taxable accounts. It covers 457B plans (which have specially rules), as well as 529 plans and both traditional and Roth accounts.

Once you’ve entered the data, OnTrajectory uses both Monte Carlo Analysis as well as historical market returns and inflation data to calculate the chances of retirement success. Finally, you can create and compare multiple retirement scenarios.

Unique Feature: You can change the order of accounts withdrawals are taken during retirement or let OnTrajectory calculate the most tax efficient order.

Try OnTrajectory

4. NetWorthify

NetWorthify is designed for those wanting to retire early, although it works with traditional retirements, too. Simply enter your income, annual savings and total savings, and NetWorthify estimates how long until you can retire. It’s free to use.

NetWorthify early retirement calculator

5. cFIREsim

Another free option that I like a lot is cFIREsim. You enter some basic information such as when you plan to retire, current savings, income, asset allocation of your investments and social security values. cFIREsim then calculates the likelihood of your success.

cFIREsim retirement calculator

Retirement Calculators Worth Considering

The following retirement tools didn’t make are list, but still may be worth checking out. In some cases, I’m continuing to evaluate them, and some make make the “best of” list in the future.

Retirement Calculators Not Worth Considering

Here are retirement tools that I believe aren’t worth our time. I list them here to keep a record of what I’ve looked at and so that readers know I’ve considered and rejected these options.

7 Best Mint Alternatives in 2021 (Free & Paid)

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Mint was one of the first free online budgeting apps when it launched in 2007. Intuit purchased Mint in 2009, and today many users are looking to replace Mint with a different personal finance app. Here are the 7 best Mint alternatives worth considering.

Alternatives to Mint.com

Top Mint.com Alternative Picks

Of all the options out there to replace Mint, three stand out among the rest:

  • Personal Capital–I’ve used Personal Capital for years. It offers the most robust budgeting, cash flow, investment tracking, and financial tools of any app out there. And it’s free.
  • Tiller–For those focused on budgeting (but not investing), Tiller is my favorite budgeting app. It connects your financial accounts (banks, credit cards, and even investments) with Google Sheets. It offers a wealth of tools to analyze everything from your monthly budget to even business expenses.  You can try it free for 30 days, then it’s $79 a year.
  • YNAB–This is the Mint replacement of choice if you want a powerful budgeting tool but don’t like spreadsheets. I’ve known the founder for about a decade and used the tool for years.

Best Alternatives to Mint Budget Tracker

1. Personal Capital–Best Overall Alternative to Mint.com

Personal Capital can easily replace Mint. Like Mint it’s free, and it offers far more tools to keep track of your finances and analyze your investments. You can link just about any financial account to Personal Capital’s app. Once linked, the dashboard gives you a complete snapshot of your money.

Personal Capital Dashboard

Beyond a high level view, Personal Capital offers a number of useful features:

  • Track spending by category or account
  • Plan your retirement with the Retirement Planner
  • Understand how investment fees erode your wealth
  • Monitor your portfolio’s asset allocation
  • Track your net worth
  • Get alerts when bills are due
  • Save for emergencies
  • New: Track Bitcoin, Ethereum, Litecoin and thousands of other tokens without giving access to your crypto wallet

I’ve written a detailed review and guide of Personal Capital that you can check out.

Try Personal Capital

2. Tiller Money–Best for those who love spreadsheets

For those focused primarily on budgeting, Tiller Money is the best Mint alternative on our list. Along with Personal Capital, I use Tiller every single day. There is, however, a bit of a learning curve. But once you understand how it works, it’s a breeze to use.

In short, Tiller enables you to connect your bank accounts, credit cards and even investment accounts to a Google Sheet (or Excel). It then gives you templates and tools to do everything from create a budget to track your spending to save for retirement.

TillerMoney - Quicken Alternative

The more I use Tiller the more I appreciate the simplicity and ease of use. If you like spreadsheets, you’ll like Tiller. To get an idea of how it works, check out this video I created.

Some of Tiller’s features include:

  • Track all your accounts in one place
  • Make a budget, track spending
  • Track your net worth with flexible, automated dashboards
  • Create your own category rules so every expense is automatically categorized accurately
  • Use flexible templates for budgeting and retirement planning
  • Works with 2FA (2-Factor Authentication)

You get a 30-day free trial. After that Tiller costs $79 a year.

3. CountAbout–Best for converting data from Mint

If you have a lot of data in Mint, CountAbout may be the budgeting tool for you. It has a feature enabling you to import data from Mint. In fact, you can import your entire Mint history into CountAbout.

CountAbout Quicken alternative

Unlike Mint, CountAbout doesn’t pummel you with advertisements. It does enable you to download transactions from your bank and customize both income and expense categories. You can save receipt images and attach them to the appropriate expense if record keeping is important.

Key features of CountAbout include:

  • Import from Quicken or Mint.com
  • Automate Transaction Downloads
  • Fully customizable income and spending categories and tags
  • Invoicing for small businesses
  • Attachment capability for receipts and images
  • Recurring transactions
  • Graphical and text-based “widgets” provide quick view of financial activity
  • Easy to use on web and iOS/Android apps

For the features you get, the cost is very reasonable. The basic plan costs just $9.99 a year (not a month). If you want automatic downloading of bank transactions, the cost is $39.99 a year.

4. Simplifi–Best budgeting app for smartphones

Simplifi is Quicken’s version of a mobile budgeting app. It’s not a mobile app for Quicken. It’s a new app built from the ground up. It uses automation to help you better manage your money.

For example, Simplifi can create a spending plan for you by analyzing your income and expenses. You can identify recurring expenses and subscriptions, which Simplifi then incorporates into the plan. It also includes a calendar view showing you upcoming expenses.

Key features of Simplifi include:

  • See your banking, credit card, loans and investments all in one place
  • Have your transactions automatically categorized
  • Find and track recurring bills and subscriptions so you can cancel what you no longer use
  • View upcoming bills, income, transfers, and see how they affect your balances
  • Set up custom watchlists and limits by category, payee, or tags to help stay on track
  • Set up savings goals for every milestone you are trying to reach
  • Track refunds on returned items

You can try Simplifi free for 30-days, then the cost is as low as $2.99 a month.

5. You Need a Budget (YNAB)–Best for budgeting

YNAB is ideal for those looking just for a budgeting tool. YNAB’s interface is similar to a spreadsheet. The tool makes it easy to budget by category based on the money you actually have in the bank. It’s not useful as an investment tracking app, however.

YNAB’s key features include:

  • Access to real-time information, from any device, anytime
  • Track goals
  • Excellent charts and graphs

It’s not free, however. You can try it free for 34 days. After that it costs $11.99 a month or $84 a year for the annual plan. The cost is the biggest downside to YNAB.

6. PocketSmith

PocketSmith started out as a calendar to plan upcoming income and expenses. Today, it’s a full-fledged budgeting app. You can sync your accounts with PocketSmith. Once synced, you can track your budget and you’re net worth. You can also see your income and spending in a handy calendar view.

Key features of Pocketsmith include:

  • Manage multiple income streams
  • Forecast your cashflow, including tools to help you reach FIRE (financial independence, retire early)
  • Track Airbnb earnings
  • Create and track savings goals
  • Integrates with Xero
  • Multi-currency

7. Fidelity Full View

Fidelity’s Full View is powered by eMoneyAdvisor, a tool used by financial planners. While Fidelity’s Full View doesn’t come with all of eMoneyAdvisor’s features, it’s still a robust tool, free, and available even if you don’t have an account at Fidelity.

Fidelity Full View

Fidelity Full View includes the following features:

  • Consolidate accounts in one place
  • Track your net worth over time
  • Create and manage a budget
  • View transactions
  • Integrates with Fidelity’s planning tools

Other Mint Replacement Options

I’m regularly evaluating new financial tools. As I do, I’ll add them to this list to help those looking to leave Mint. Here are some of the options I’m evaluating:

  • Every Dollar: The Dave Ramsey budgeting solution. While Dave is popular with those paying off debt, this solution is one of the most expensive and it doesn’t have near the features that a tool like Personal Capital offers.
  • Banktivity: One of the few budgeting apps designed for the Mac, Banktivity is another option. One question to consider though is whether an iOS specific software is necessary today. Everything is online or in an app.
  • Unifimoney: This app is designed for high earning professionals. It combines money management tools with saving, spending and investing services.

Why Switch from Mint?

Mint continues to offer a free, solid budgeting app. There are, however, several reasons to consider an alternative.

The first is its limited investing tools. While you can track your investments in Mint, the many of the options here offer far better investing tools. Personal Capital, for example, shows a portfolio’s asset allocation, investment fees, and retirement readiness.

Second, Mint uses an advertising revenue model. The result is a user experience plastered with ads.

Mythodology

My first step in evaluating Mint alternatives was to use dozens of budgeting and investment tracking apps. I’ve used each of the tools in our list extensively, with the exception of Pocketsmith and CountAbout (I’m working on those two now). I’ve also undertaken indepth research into these and more than 25 other options.

In evaluating these apps, I focused on the following key criteria:

  • Cost
  • Ease of use
  • Mobile app availability
  • Ability to consolidate all accounts in one place
  • Budgeting tools
  • Investment tracking tools

Mint Alternatives FAQs

What is the best free alternative to Mint?

Personal Capital is the best free Mint replacement. It comes with nearly every feature Mint offers, and many additional tools. It’s particularly well suited for those who want to manage all of their money in one place, including investments.

What is the best option to migrate Mint data to new app?

If you want to migrate Mint data to a new budgeting app, CountAbout is a solid option. It has features enabling users to migrate data from Mint.

What is the best Mint replacement for calendar budgeting?

PocketSmith is a good choice as it offers a calendar view of your budget.

Which Mint alternatives allow you to schedule bill payments?

With both Tiller Money and YNAB, you can plan future bill payments. Tiller offers a Bill Payment Tracker template and YNAB enables you to allocate funds to bills you plan to pay in the future.

Should I switch from Mint.com?

Mint continues to offer a solid budgeting and investment tracking app. Some, however, have complained about issues connecting Mint to banks and other financial institutions. It also uses an advertising revenue model, so users are inundated with ads.

Whatever tool you choose, the key is to pick one that works for you. For me, that’s Personal Capital. One or more of the above Mint alternatives, however, should suit the needs of most looking to better manage their money.

3 Ways Early Retirees Can Tap Retirement Accounts Without a 10% Penalty

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Fidelity ZERO Funds–Are They Worth the Cost?

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Fidelity launched its ZERO index funds in 2018 to much fanfare. As their names suggest, these funds carry no expense ratios, a first in the industry.

As great as a “free” mutual fund may sound, however, many wonder whether there is a catch. Recently a subscribe to my YouTube channel asked the following questions:

Could you please share your thoughts on Fidelity ZERO funds vs their fee based funds?Fidelity ZERO International Index Fund (FZILX)Fidelity ZERO Total Market Index Fund (FZROX)Fidelity ZERO Large Cap Index Fund (FNILX)Fidelity ZERO Extended Market Index Fund (FZIPX)

Is FNILX + FZIPX = FZROX ?

ZERO funds have no fees, but other than cost, do you see any reason why one should invest in fee based instead of zero funds?

If you could please create video and share your thoughts, that would be very helpful.

Let’s dive into the details to get a better understanding of the Fidelity ZERO funds.

4 Fidelity Zero Funds

The ZERO funds consist of four index funds. These funds charge no fees in the form of an Expense Ratio, although they do pass on transaction costs to investors. There are also no minimum investment requirements.

The catch, if you want to call it that, is that the funds track proprietary indexes Fidelity created. That means, for example, that the Fidelity ZERO Large Cap index fund does NOT track the S&P 500, as one might expect.

Here are the details on each fund’s tracking index. (Note that Fidelity does not offer a ZERO fund for bonds.)

Fidelity ZERO Large Cap Index Fund (FNILX)

The Fidelity ZERO Large Cap Index Fund tracks the Fidelity U.S. Large Cap Index. The index is a float-adjusted market capitalization-weighted index. That simply means it tracks companies based on the number and value of shares outstanding in the market. Its focus is on the U.S. large capitalization equity market.

The index tracks the top 500 companies. It can, however, have fewer companies based on liquidity and investing screens that Fidelity uses. For example, the index (and the other two U.S. indexes discussed below) exclude companies with capitalizations under $75 million or with limited trading volume.

It can also have more than 500 stocks if some companies have multiple share classes. Fidelity rebalances the index annually on the third Friday in February (so mark your calendars!).

The index is similar to the S&P 500 index, but there are some differences, as we’ll see below.

Fidelity ZERO Extended Market Index Fund (FZIPX)

The Fidelity ZERO Extended Market Index Fund (FZIPX) tracks the Fidelity U.S. Extended Investable Market Index. Its designed to track U.S. mid- and small-cap stocks. It is a subset of the Fidelity U.S. Total Investable Market Index (see below), excluding the 500 largest companies.

Perhaps the closest comparison of this index is the the Dow Jones U.S. Completion Total Stock Market Index. The primary difference is that the Fidelity index is limited to 2,500 companies, whereas the Dow Jones index has just under 3,500 companies.

Fidelity ZERO Total Market Index Fund (FZROX)

The Fidelity ZERO Total Market Index Fund (FZROX) tracks the Fidelity U.S. Total Investable Market Index. This index is effectively a combination of the Large Cap and Extended Market indexes described above. As such, it is limited to 3,000 companies.

Its closest comparison is the Dow Jones U.S. Total Stock Market Index. It’s not an exact match, however, as the Down Jones index tracks nearly 4,000 companies.

Fidelity ZERO International Index Fund (FZILX)

Finally, the Fidelity ZERO International Index Fund (FZILX) tracks the Fidelity Global ex. U.S. Index. Fidelity designed this index to track mid- and large-cap companies headquartered outside the U.S. The index is created by selecting the top 90% of stocks as measured by market cap in each country.

This index is similar to the MSCI ACWI Ex USA Index. This index, however, holds about 4,700 companies, while the free version holds about 2,300 companies.

How Fidelity ZERO Funds Compare

While free funds offer an initial appeal, one wonders if investors are getting what they paid for. Are the Fidelity indexes used by the ZERO funds generating the same or better returns as the more widely used indexes? This is particularly important given that other Fidelity index funds, while they charge a fee, are still very close to $0 in cost (generally 6 basis points or less).

To getting a better understanding, I compared each of Fidelity’s ZERO funds with a close counterpart offered by Fidelity.

FNILX vs FXAIX

Fidelity’s Large Cap ZERO fund is arguably the closest to its most comparable index, the S&P 500. A comparison of the fund to Fidelity’s S&P 500 index fund (FXAIX) in Morningstar shows very similar style boxes and the same top 10 holdings. The notable difference is in the percentage held of each of the top 10 companies (the ZERO fund is on the left in each snapshot).

Performance data on the ZERO funds is limited as the funds were launched in 2018. Nevertheless, since then the ZERO Large Cap fund has outperformed Fidelity’s S&P 500 index fund by substantially more than its 1.5 basis point fee:

Whether the ZERO fund will continue to outperform the S&P 500 index only time can tell. As you’ll see below, however, the other ZERO funds have performed as well.

https://fundresearch.fidelity.com/mutual-funds/summary/315911750 (FXAIX)

FZIPX vs FSMAX

Fidelity’s Extended Market Index fund (FSMAX) tracks the Dow Jones U.S. Completion Total Stock Market index. Think of it as everything except the companies in the S&P 500. As such, it covers about 1,000 more companies the Fidelity’s proprietary completion index used for the ZERO extended fund. Its cost is just 3.5 basis points.

In the short time FZIPX as been available, it has significantly underperformed FSMAX even with the same volatility. Here are the comparisons:

FZROX vs FSKAX

Fidelity’s Total Market Index fund (FSKAX) is the closest comparable to its ZERO Total Market fund. FSKAX charges just 1.5 basis points and gives investors exposure to over 3,700 stocks. The ZERO fund, in contrast, holds about 2,600 equity holdings.

While returns thus far have been nearly identical, FSKAX has managed to edge out the ZERO fund by 2 basis points. The comparable performance is likely driven by the similar returns amongst the larges U.S. companies in these cap-weighted funds.

https://fundresearch.fidelity.com/mutual-funds/summary/315911693 (FSKAX)

FZILX vs FTIHX

Fidelity’s Total International Index (FTIHX) charges 6 basis points and tracks the MSCI ACWI ex USA Investable Market index. The style box for this and the ZERO International Index are nearly identical. The free fund, however, hold just under 2,400 stocks while FTIHX holds over 4,700 stocks. And FTIHX has edged out the ZERO fund in performance thus far.

Final Thoughts

The cost of most index funds have fallen dramatically over the last few decades. Today one can invest in an index fund for 10 basis points or less. In many cases, a fund costs less than 5 basis points. For that reason, Fidelity ZERO funds seem more like a marketing strategy than a product that meets investors’ needs.

Certainly free beats even a very small cost. The problem is that fidelity achieves a 0% Expense Ratio by tracking its own proprietary indexes. I’m not sure that’s worth saving a few basis points each year. And thus far, with perhaps the exception of the Large Cap ZERO fund, these funds have trailed their Fidelity counterparts by more that the cost savings.

That said, I would have no reservations investing in one of these funds in a 401k if it were my best option.

Resources

The 60/40 Portfolio for Retirees–Good, Bad or Ugly?

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The 60/40 portfolio has powered retirements for decades. With 60% stocks and 40% bonds, this balanced fund offers equity-fueled growth and fixed income stability.

Today, however, many are calling into question the sustainability of the 60/40 portfolio. Some even argue that it’s dead and that retirees need take on more risk if they want to avoid outliving their retirement savings.

In this article we’ll take a deep dive into the 60/40 portfolio and whether it’s still a viable approach to investing for retirees.

Table of contents

A Brief History of the 60/40 Portfolio

Dating back to 1926, the 60/40 portfolio has enjoyed an annualized return of 9.1% (Source: Vanguard). Its best year, 1993, saw returns of 36.7%, while its worst year, 1931, experienced a loss of 26.6%. Over those 95 years, 22 saw the portfolio decline in value. The returns combined with relative stability have made the balanced portfolio ideal for retirees.

More recent returns show similar results. From 1972 to 2021 a 60/40 portfolio consisting of an S&P 500 index for stocks and intermediate term Treasuries for bonds has returned 9.61% with a standard deviation of 9.51% (via Portfolio Visualizer). The combination of solid returns with less volatility has been ideal for retirees.

In his 1994 paper, certified financial planner Bill Bengen gave us what is now known as the 4% Rule. In brief, the 4% Rule states the following:

  • A retiree can spend 4% of their investments in the first year of retirement;
  • In subsequent years, the retiree can adjust the prior year’s distribution by the rate of inflation; and
  • Following this approach, the retiree should not outlive their money.

Why do we care about the 4% rule? We care because the 60/40 portfolio fits in the sweet spot of the 4% Rule. Bengen found that retirees should hold somewhere between 50% and 75% in equities. In a later book, he identified 60/40 as the ideal portfolio in retirement to avoid outliving a nest egg. Other papers evaluating safe withdrawal rates have reached similar conclusions (as we’ll see in a minute). Some have even evaluated its performance back to 1871!

Notwithstanding the 60/40 portfolio’s stellar history dating back to the post-Civil War era, many are now calling into question its future.

Arguments that 60/40 Portfolio is Dead

There have been several arguments put forth that the 60/40 portfolio is no longer ideal for retirees. All of the arguments stem from the unprecedented financial times we are currently in.

Argument #1: Bond yields are at all-time lows

The yield on the 10-year Treasury sunk to its lowest in 2020 and remains at historic lows. When viewed on a yearly basis, the yield sunk below 2% back in 1941 (1.95% to be precise). Apart from that one year, it remained above 2.00% until 2012 (Source: Shiller). It’s currently at about 1.30%.

During much of the 20th century, the yield was significantly higher. It reached over 14% in 1982. At today’s low yields, many question how a 60/40 portfolio could survive a 30-year retirement.

From Money (4/21/21):

“I think the 60/40 portfolio is antiquated,” says Keith Singer of Singer Wealth Advisors in Boca Raton, Florida. “When bonds used to pay 6-8% and interest rates were falling, the 60/40 model worked great. But as they say, past performance is no guarantee of future results, and that is especially true with the 60/40 portfolio.” (Source: Money).

Argument #2: The 40-Year Bull Market in Bonds Is Over

The second argument relates to the fall of yields over the past 40 years. They hit a high in 1982, and then steadily dropped to their historic lows today. As bond yields fall, the value of existing bonds go up. As such, retirees have benefited from falling interest rates. Unless rates go negative, however, most believe the bull market in bonds is over

If the bond bull market is over, and rates begin to rise, the value of existing bonds will fall. Rising rates can also lead to lower asset values on everything from stocks to real estate, which brings us to the third argument.

Argument #3: Equity Valuations are High (and must fall significantly)

Many point to the richly valued S&P 500. The Shiller PE, which measures price-to-earnings over 10-year periods, is at one of its highest levels.

Shiller PE
Source: https://www.multpl.com/shiller-pe

The argument here is simple. Lofty valuations suggest that stock returns over the next decade will be much lower than historical averages.

At the same time, many argue that the 60/40 portfolio should shift to a greater allocation in stocks. The reason is that while stocks are expensive, the additional long-term returns are needed to offset the paltry returns expected from bonds.

A recent report from Goldman Sachs framed the issue as follows:

The beneficial role of bonds in balanced portfolios has more recently been in doubt given that bond yields close to the zero lower bound offer a diminished returns buffer during “risk-off” periods. These doubts have only increased alongside concerns that an accelerating economic recovery from the pandemic-induced recession, amplified by historically large US fiscal stimulus, could lead to a strong rise in inflation and, in turn, the start of a prolonged bond bear market. During most historical bond bear markets, equities have outperformed bonds and have delivered positive real returns. This has been especially the case over the last 20 years, during which bond bear markets tended to be short and shallow.

Source: https://www.goldmansachs.com/insights/pages/gs-research/reflation-risk/report.pdf

Argument #4: Negative Correlation May be Over

Finally, many believe the negative correlation that stocks and bonds have enjoyed over the past two decades may be over. In a report entitled The End of 60/40, Bank of America analysts warn that bonds may no longer provide the diversification investors have come to expect.

60/40 portfolio diversification

The authors explain,

The core premise of every 60/40 portfolio is that bonds can hedge against risks to growth and equities can hedge against inflation; their returns are negatively correlated,” Woodard and Harris added. “But this assumption was only true over the past two decades and was mostly false over the prior 65 years. The big risk is that the correlation could flip, and now the longest period of negative correlation in history is coming to an end as policy makers jolt markets with attempts to boost growth.

In short, there’s no place to hide.

Arguments that 60/40 Portfolio is Still Solid

All of the above arguments identify real and significant challenges to the capital markets. Interest rates are at historic yields. The 40-year bull market in bonds does appear to be over. And stock valuations are extremely high.

Nevertheless, I believe the 60/40 portfolio is still ideal for retirees. It’s not the only reasonably allocation in retirement, but it will continue to support a retiree for 30 years or more who relies on the 4% Rule. Here’s why I believe this.

Argument #1: Retirees are long-term investors

Those who retire at a traditional age are long-term investors. For a 65-year-old couple, there is a 1-in-4 chance of at least one spouse living past 97 and a 1-in-10 chance of at least one spouse living to 100 (Source: BofA). Retirees could be in the market 35 years or longer. To put that number in perspective, 35 years ago Ronald Reagan was President and Boy George and Mr. T were filing an episode of The A-Team.

The point is that while both equities and bonds may underperform over the next several years, or decade, retirees must consider a much longer time horizon.

Of course, the first ten to 15 years of retirement are critical. Due to the sequence of returns and inflation risk, a devastating market in the first decade of retirement could spell disaster. And that brings us to the second point.

Argument #2: The 60/40 Portfolio has Worked Since 1871

No, that’s not a typo. Researchers have tested the 60/40 portfolio against the 4% Rule with markets dating back to just after the Civil War. It’s never failed.

Michael Kitces, CFP, published a paper showing the maximum initial withdrawal rate one could have taken in the first year of retirement without running out of money over a 30-year retirement. His research tested retirements beginning in 1871.

Initial safe withdrawal rate by year
Source: https://www.genesiswealthmanagement.com/files/documents/SafeWithdrawalRate%20%28Kitces%29.pdf

The lowest initial withdrawal rate was 4.4% in 1966. Some years could have seen an initial withdrawal rate of over 10%. The point is that a 60/40 portfolio has sustained a 30-year retirement through the aftermath of the Civil War, the Panic of 1893, WWI, the Great Depression, WWII, the stagflation of the 1970s, the tech bubble, 9/11, the Great Recession, and the ongoing Covid pandemic.

Argument #3: The 60/40 portfolio offers growth and stability

When compared to a portfolio heavily weighted in stocks, the 60/40 portfolio stands out for its excellent growth and muted volatility. That’s not to say it’s not volatile, but its up and downs are significantly less than a 100% stock portfolio. And that’s precisely what many retirees need.

Since 1972, a 60/40 portfolio has returned an annual compound rate of 9.61%. These returns are lower than a 100% stock portfolio, which returned 10.75% over the same period. What’s notable, however, is the volatility. The standard deviation of a 60/40 portfolio was just 9.51%, while the stock portfolio came in at 15.25%.

To put these differences in perspective, the worst year for a 100% stock portfolio during this period was -37.45%, compared to just -16.88% of the 60/40 portfolio. At the same time, the worst maximum drawdown for the stock portfolio was nearly -51%, compared to -28% for the balanced portfolio.

The increased volatility that comes with 100% stocks brings us to the next argument.

Argument #4: Retirees can stick with a 60/40 portfolio

Studies have shown that investors are not adept at timing the market. Called the investor gap, studies have documented the gap between an investment’s return and an investor’s return. Because investors tend to buy high when stocks are rising and to sell low in a panic when investments fall, they consistently underperform the very investments where they place their money.

One Morningstar study found that investors lost on average 45 basis points due to market timing. There was, however, one bright spot. The study found that investors in less volatile investments performed better. From the study,

When we broke down funds within asset classes based on their standard deviation, we found that funds in the least-volatile quintiles consistently had higher investor returns than those in more-volatile quintiles. This suggests that “boring” funds work well because they aren’t as likely to inspire fear or greed.

A portfolio with more stocks may perform better over the long-term. Investors in retirement, however, need to ask whether they can handle the ride.

Argument #5: The 60/40 portfolio survived rising rates and inflation

No two time periods are identical. Today we face challenges the U.S. and world have never faced. We can, however, look back at similar times to gain an understanding of how the 60/40 portfolio might perform when interest rates and inflation rise. Here I’m thinking of the period from 1941 to 1982.

The yield on the 10-year Treasury stood at 1.95% at the start of 1941. In 1982 it began the year north of 14%. Over the decade leading up to 1982, the U.S. experienced double-digit inflation, with low growth, giving way to the term stagflation.

During this time how did the 60/40 portfolio perform for retirees? Just fine. To be sure, this period is why we have the 4% rule. It represents the low water mark on a safe initial withdrawal rate. But that rate still stands at 4 to 4.5%.

The 60/40 portfolio also performed well more recently when rates began to rise earlier this year. The first quarter of 2021 was the worst for U.S. investment-grade bonds in the last two decades. The 60/40 portfolio did just fine:

“The first quarter of 2021 showed that even the worst quarter for U.S. investment-grade bonds in the last 20 years wasn’t enough to derail the classic 60/40 portfolio”, says Jason Kephart.

So what’s the take for investors. As long as the correlation between traditional asset classes doesn’t shift dramatically and the portfolio continues to rise over time, then holding a 60/40 portfolio still makes sense.

That doesn’t mean investors shouldn’t consider some alternative mixes but perhaps hold those on the margins and keep your core in stocks and bonds. Although, instead of holding broad indexes, they might want to consider diversifying by adding buckets of individual stocks and bonds.

At the end of the day, the most important risk any investor should always think about is the permanent loss of capital and the loss of purchasing power. The 60/40 portfolio still offers the best defence. And even it if did seem to veer off course at one point, it could have been by design.

Source: https://www.morningstar.ca/ca/news/213154/does-the-60%2F40-portfolio-still-make-sense.aspx

Building a 60/40 Portfolio

So far we haven’t discussed the stock and bond investments that make up a 60/40 portfolio. Most of the studies on a balanced portfolio use an S&P 500 index for stocks and intermediate term U.S. bond fund for fixed income. Given current economic challenges faced by retirees, should we further diversify our asset classes?

Warren Buffett would likely say no. The Warren Buffett portfolio he recommends consists of just two asset classes: S&P 500 index and short term U.S. government bonds. He’s bullish on the future of the United States.

At the same time, the U.S. faces significant hurdles. Its population is aging, reducing the workforce while increasing the cost of social programs for senior citizens. The country’s debt to GDP ratio skyrocketed as a result of the pandemic and now stands at more than 125% (Source: The Fed). And our politicians in Washington seem willing to continue borrowing at unprecedented levels indefinitely. Eventually we’ll have to pay for all of this spending.

As a result, some financial advisors recommend moving beyond U.S. stocks and Treasuries. Bob Rice, the Chief Investment Strategist for Tangent Capital made such an argument when he spoke at the fifth annual Investment News conference for alternative investments.

“You cannot invest in one future anymore; you have to invest in multiple futures,” Rice said. “The things that drove 60/40 portfolios to work are broken. The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore. It was convenient, it was easy, and it’s over. We don’t trust stocks and bonds completely to do the job of providing income, growth, inflation protection, and downside protection anymore.”

Source: https://www.investopedia.com/articles/financial-advisors/011916/why-6040-portfolio-no-longer-good-enough.asp

While I don’t share his pessimistic views of the 60/40 portfolio, diversifying to international equities seems reasonable. This could include both developed countries and emerging markets. Other diversification opportunities could include real estate (REITs) and commodities. For bonds, some argue that retirees should take on more credit risk through high-yield bonds and emerging market debt.

Having said that, there’s no guarantee that diversifying the portfolio will lead to better results. A well diversified portfolio has significantly underperformed a basic 60/40 portfolio over the last 15 years (commodities data wasn’t available before 2007 in Portfolio Visualizer).

diversified 60/40 portfolio

At the same time, if we remove commodities and add the 5% allocation back into the S&P 500, we extended the data to 1999 AND see that the greater diversification paid off.

60/40 diversification

Of course, this time period saw the tech bubble burst, 9/11 and the Great Recession, all of which had significant affects on the S&P 500. And that really is the point. While diversification is generally a sound approach to investing, it’s not a guarantee of higher returns.

Final Thoughts

The 60/40 portfolio is certainly not the only reasonable approach to investing in retirement. Yet for many retirees, it has stood the test of time. It offers both growth and stability, which retirees need for their money to last 30 years or more.

Nobody knows the future. Is it possible that we could see unprecedented economic conditions that could wreck havoc on retirees? Of course we could. Although if that happens, one wonders if any asset allocation would save us.

How Much Cash Should Retirees Keep On Hand?

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Moving from a regular paycheck to living off of your nest egg is not an easy transition. At least it hasn’t been for me. One of the many decisions retirees must make is how much cash should they have in the bank.

For some it’s a question of budgeting. They keep enough to pay the bills over the next several months, but that’s it. For others cash acts as a buffer in the even the stock market drops 10%, 20% or more. For those who see cash as a buffer, several more questions need to be considered:

  • How much cash should you keep in the bank?
  • How do you decide when to replenish your spending account?
  • Do you factor the amount of cash you have into your overall asset allocation?

In this article I’ll explore these questions. We’ll look at some research papers that address these questions. We’ll also talk about how you can get the psychological benefits of holding lots of cash without actually holding lots of cash.

The starting for all of this is the 4% Rule. First, however, we need to cover the basics.

Table of contents

What is Cash?

For our purposes, I define cash as money in an FDIC-insured account (checking, savings, money market account or possibly a certificate of deposit) or a money market fund. The later is not FDIC-insured, but it’s extremely safe.

What I don’t include in cash are bonds. That’s true even for short-term U.S. government bonds. T-bills as they are called are extremely safe. But they aren’t cash. And even a short-term bond fund can lose money when interest rates rise.

What about Social Security, Pensions, Annuities, and Part-Time Work?

Retirees fund retirement from many sources. Most receive social security. Many have pensions or annuities. And some, myself included, still do part-time work to generate some income. All of these sources generate cash for us, typically on a monthly basis.

The question we are addressing is how much cash, over and above any cash these other sources generate, do we need to pull from our investments. In other words, how much do we need to pull from 401k, IRA and taxable accounts each month or year for living expenses.

These other sources will of course reduce how much we have to pull from our investments. But most of us have to pull something out, and that’s what this article addresses.

The Budget-Dividend Strategy (My Preferred Approach)

My preferred approach to cash in retirement is what I call the Budget-Dividend Strategy. The nice thing about this approach is that it addresses three liquidity concerns at the same time:

  1. It guarantees that I’ll always have cash on hand
  2. It helps with budgeting
  3. And it coincides with quarterly dividend payments, which can be used as a source of funds

Here’s how the Budget-Dividend Strategy works.

At the start of the year I pull six months worth of living expenses from our investment accounts. In our case the money gets deposited into our checking account.

When the balance declines to three months of living expenses, we add cash to bring the balance back to the six months of expenses level. If we are generally on track with our budget, this should happen after three months.

The timing is convenient because ETFs and mutual funds typically pay dividends at the end of each quarter. In our taxable account, we do not automatically reinvest dividends. So once the dividends hit our money market fund in our brokerage account, I can move some or all of them over to our bank account.

If we need more than the dividends give us, I withdrawal additional funds from investment accounts. Here I make the decision on a number of factors, such as taxes and which asset classes have performed best.

Once we start taking Required Minimum Distributions (still two decades away), we’ll use the RMD to fund living expenses as well.

Benefits of the Budget-Dividend Strategy

The are several benefits to this approach.

First, we keep the vast majority of our capital fully invested. Even assuming an initial 4% distribution per year, we never have more than 2% in cash (6 months of living expenses). And this number drops to 1% (3 months of living expenses) before we replenish the cash account.

Second, the timing of when we replenish the account coincides with distributions from ETFs and mutual funds. This isn’t necessary, and may be irrelevant for those without significant taxable investments. But it’s convenient for us.

Third, the approach also makes budgeting easier. We track our spending in Personal Capital and Tiller Money. This approach to cash, however, makes it easy to know at a glance if we are on track, over spending or under spending.

The No Cash Strategy

One approach to cash in retirement is virtually no cash at all. One could sell investments monthly to cover just one month of expenses. If most spending is put on a credit card, the no cash strategy could work.

Personally, I find the idea of tapping my investments monthly to be too much of nuisance. Still, it’s worth pointing out that one could take this approach. For those who do, finding a broker that offers check writing, online bill pay, and perhaps even a debit card would be useful. Even here, however, you’d be transferring funds from stock and bond funds to a money market fund every 30 days, which many would find tiresome.

The Buffer Strategy

Our approach to cash keeps the vast majority of our assets fully invested. Some advocate a different approach called the Buffer Strategy. The idea is to keep as much as five years worth of living expenses in cash. The strategy has some initial appeal.

Over the past 100 years, the worst stock market performance saw a decline four years in a row (from 1929 to 1932). The market has never been down five years in a row.

Here’s a chart of the S&P 500’s yearly performance dating back to 1928:

S&P 500 performance by year from 1928 to 2021

Of course the market could be down 5 years in a row sometime in the future. But the idea of a cash cushion is to avoid selling stocks when the market is down. It has some intuitive appeal.

And it’s a bad strategy.

First, if we rebalance our portfolio at least once a year, we won’t sell stocks in a bear market. When the market is down significantly, the simple act of rebalancing will cause us to sell bonds and buy stocks. This is true even if bonds decline a bit.

For example, in 1931 the 10-year Treasury Bond was down 2.56%. The S&P 500 (or equivalent) was down more than 43%! In that scenario, we still be selling bonds to buy stocks as part of rebalancing.

Just as important, holding five years worth of cash creates a serious drag on our portfolio’s performance. Let’s make sure we understand why.

Cash and the 4% Rule

The 4% Rule comes from a 1994 paper written by financial planner Bill Bengen. Using historical returns and inflation data, Bengen tried to answer how much a retiree could spend each year without going broke.

His conclusion was that a retiree could spend 4% of his or her nest egg in the first year of retirement. Thereafter, they could increase this amount by the rate of inflation (he used CPI). Following this approach, he concluded, a retiree’s nest egg would last at least 30 years, and in some cases 50 years or longer.

There were, however, some important underlying assumptions in his work. For example, he assumed retirees invested in an S&P 500 index fund for stocks and an intermediate U.S. government bond fund for bonds. He also concluded that stocks should represent 50 to 75% of a retiree’s asset allocation. Any more and a big stock market decline (e.g., 1929 to 1932) would shorten the longevity of a portfolio. Any less and a return to double-digit inflation could do irreparable harm.

So what does this have to do with how much cash we should hold?

For his analysis, Bengen assumed that retiree withdrew funds from the portfolio once a year and then rebalanced. The rebalancing did not factor in the cash that was just taken from the portfolio. His focus was not on how much cash to hold. That’s just the approach he chose for his analysis.

Nevertheless, it’s important to keep his approach in mind. For those choosing to deviate from a once-a-year distribution strategy (at most) to hold significantly more cash, keep in mind that the conclusions from his research may not hold. And indeed, subsequent research confirms this outcome.

Research on the Buffer Strategy

Arguably the most comprehensive study comes from Professor Walter Woerheide, Ph.D., ChFC, CFP®. At the time of publication, he was the Frank M. Engle Distinguished Chair in Economic Security Research, at The American College in Bryn Mawr, Pennsylvania.

In 2012 Professor Woerheide published a paper entitled, Sustainable Withdrawal rates: The Historical Evidence on Buffer Zone Strategies. He evaluated cash buffers of one to four years, using a replenishing strategy based on whether the investment portfolio was up or down the previous years.

If the investments were up, the cash buffer was replenished along with any required withdrawals. If the portfolio was down, withdrawals came from the cash buffer. The only time cash came from the investment portfolio following a down market was if the cash buffer were exhausted.

Looking at several different asset allocations, the results were clear. A cash buffer strategy underperforms a standard rebalancing approach. It reduces the likelihood that a portfolio will last 30 years. It also reduces the portfolio’s balance at death.

Here’s a summary of his findings:

Cash Buffer and Sustainable Withdrawal Rates

Several other studies have confirmed these results:

Harold Evensky

Harold Evensky is the father of the bucket strategy. He’s also a proponent of the Buffer Strategy for cash. In 2021 he co-authored a paper (The Benefits of a Cash Reserve Strategy in Retirement Distribution Planning) that concluded a cash buffer equal to one year of expenses actually improved the likelihood that a portfolio could be sustained for at least 30 years. His study is the outlier and deserves a brief comment.

He found the a 1-year buffer strategy (he called it the Cash Flow Reserve or CFR) out performed a standard rebalancing approach (RDCA–Reverse Dollar Cost Averaging), particularly with taxes and transaction costs were factored in. Here’s a summary of his findings:

Survival Rates for Cash Buffer Strategy

There are several serious flaws in the study.

First, it used a 1-year cash buffer that was allowed to fall to just two months. As a practical matter, that’s no cash buffer at all.

Second, he used a Monte Carlo simulations instead of historical data. In and of itself this isn’t a problem, but the inputs he used heavily favored cash. He assumed an average stock return of 8.75%, well below the historical average. He also assumed a 3.5% return on cash with a 3.0% rate of inflation. This gave cash a 0.50% real return.

In other words, the study was designed to reach a certain conclusion, in my opinion. The fact is that a significant cash cushion represents a significant drag on performance that hurts retirees in the long run.

How to Sleep at Night with Little Cash in the Bank

While it’s clear that the Buffer Strategy underperforms, we need to address the psychology factors. As someone who is semi-retired, I understand firsthand the fear of spending investments. That fear grows when the stock market drops as it did at the start of the Covid pandemic.

To address this real concern, here are a few approaches retirees can take that won’t do as much harm as holding too much cash.

First, calculate how long you can live on just your bonds. If you have a 60/40 stock/bonds allocation, for example, you can live on just the bonds for about 10 years, assuming an initial 4% withdrawal.

This approach assumes your bonds are primarily U.S. government short and intermediate-term bonds. Riskier bonds, such as high-yield or emerging market debt might not provide as much comfort. The point is that recolonizing just how long your bond portfolio can get you may help you weather a stock market decline.

Second, and related to the first, is to allocate some of your bonds to cash. For most this would mean a money market fund. For example, a 60/40 portfolio would become a 60/30/10 portfolio (stocks/bonds/cash). Studies have found that converting some of the bonds to cash doesn’t have a major effect on the longevity of the portfolio.

Bill Bengen actually reached this conclusion in a 1997 paper. He found that a 10% allocation to short-term U.S. Treasury Bills did not significantly reduce the starting safe withdrawal rate of about 4%. Others have reached similar conclusions (see here and here).

Final Thoughts

Investing during retirement can be stressful. Still, we need to resist the urge to play it “safe” by holding too much cash. What may feel safe could over time do far more harm than good. A simple approach of three to six months in cash keeps are capital invested while still giving us ample room to do with unexpected expenses.

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