Would You Consider This One Thing To Be A ‘Conservative Investment?’

December 22, 2017

As someone who has a moderately aggressive investment approach, I recently had a conversation with a friend who has a very aggressive investment approach (in my opinion) that made me rethink a piece of my investment philosophy.

Safe lifestyle, ‘risky’ investing style

Here’s his story: he & his wife, who are both 50, have put four kids through college (all four graduated with absolutely no student loans), will completely pay off their mortgage by age 55, and have amassed roughly $500,000 in the combination of their 401(k) plans & IRAs. They have no significant savings outside of retirement plans, but given the amount of spending they have done on the kids’ education, that is hardly a thing to worry about today.

They are hard workers and excellent savers. Their lifestyle entails very little in the way of risky behavior — they eat nutritiously, exercise regularly, do good deeds in the community, and live a fairly frugal lifestyle. We had never talked about money before, so I was surprised at what I learned — I guess I just assumed he’d be relatively averse to market risk with his investments as well.

All-in with stocks

When we started talking about how our retirement accounts are invested, he told me that he is invested 100% in the stock market and has no plans to “get more boring & conservative” over time. When I expressed surprise at his attitude toward completely excluding bonds and cash, even as he approaches retirement age, he said something that changed my perspective. In his opinion, Social Security fulfills the “conservative” bucket in his overall investment life.

Doing the math

According to his math, since he plans to work another 12 years (to get to age 62), between contributions to his retirement accounts and the growth of that money, he is expecting to have about $1 million saved at that point. If they retire at 62, he and his wife will receive roughly $2,800 per month in Social Security income ($1,500 for him, $1,300 for her).

Social security as an income-producing asset

Here’s the twist: since he considers Social Security income his “bond & cash” portion of his investment portfolio, he calculated its equivalent in income-producing bonds. He assumes that if you buy long term US Treasury Bonds, you should average a 4% – 5% rate of return over a long period of time. How much would you need in Treasuries to earn $2,800/month?

Using his return estimate, he would need to have between $672,000 and $840,000 invested in bonds producing 4 – 5% in order to generate a solid $2,800/month indefinitely. So, when looking at his $500,000 retirement accounts, he thinks he has way less than 100% invested in stocks. In his viewpoint, his current mix is 37% stocks, 63% bonds because of the $840,000 that would be required to generate that Social Security income (he used the biggest number available to exaggerate his point!).

Competing viewpoints

I thought he was an aggressive investor because of the way his accounts are invested and he thinks his portfolio is far too conservative. While I think he has a point, I don’t think it’s an appropriate way for most of America to start viewing their investment accounts — Social Security isn’t a given for most people under the age of 45, and he doesn’t factor in the fact that he can’t tap his SS payment early if he needs a lump sum for something like a new roof or hip replacement. But it is an interesting way to look at any type of guaranteed monthly income, since that is a relatively safe “investment.”

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