Different times call for different measures.
And in today’s crazy market, one of the most well-respected retirement strategies is now irrelevant.
Many professional investors have yet to adjust to the new environment, unfortunately.
And if you follow their outdated approach, you’re essentially guaranteeing more danger in your retirement account.
But if you adapt your strategy to account for today’s new reality, you could generate more income, grow your wealth more quickly and reduce your risk in the process.
Allow me to explain…
Why the 60/40 Rule No Longer Works
Investment advisors have told retirees to stick to the “60/40” rule for decades.
If you’re not already familiar, it means that you put 60% of your retirement wealth into shares of stocks and the other 40% into bonds.
Historically, this has worked well to balance risk and stability.
In the past, bonds traded with relatively attractive yields, giving retirees guaranteed income in both good times and bad.
So even during periods when the market pulled back, income from the wealth invested in bonds helped to offset losses in stocks.
And interest rates are often cut during these challenging economic times. When this happens, bond prices trade higher — to a point.
So the 60/40 rule led to investment gains on the wealth invested in bonds.
That all sounds very helpful, which is why investors have stuck with this ratio for so long.
But when you fast forward to today, we have a very different environment that makes the traditional 60/40 rule obsolete.
You see, with interest rates now at historic lows, bonds simply don’t offer enough income to be attractive.
10-year treasury bonds, for instance, only pay about 0.7% each year from now until they mature in 10 years.
That’s below the rate of inflation, which means you’re essentially guaranteed to lose value for as long as you hold the bonds.
What’s more, the market price for bonds always trades inversely with interest rates. So if rates move higher, the price for your bond positions will move lower.
Since interest rates are close to zero, there’s little chance that rates will move lower and cause bond prices to increase.
But over the next several years, there’s a good chance that interest rates could rebound from their current historically low levels. And a rebound in interest rates would cause the 40% of the 60/40 strategy to trade lower.
Bottom line: bonds currently offer very little, if any, safety for investors. And they could be a ticking time bomb for your retirement wealth.
Following the 60/40 rule no longer gives you stability. It actually increases your risk!
Setting Up a New Approach to Grow Your Wealth
With historically low interest rates and so much uncertainty in the market, income is an extremely important part of your retirement planning.
That’s why today, I recommend investing up to 60% of your wealth into positions that will generate cash for your retirement expenses.
We want this portion of your retirement to also have the potential to grow your wealth over time. That’s something that bonds simply can’t do today with interest rates that essentially guarantee a loss of wealth.
Even though bonds don’t give you the income and protection you need for your retirement, several other areas will fit the bill.
For example, shares of many blue-chip dividend stocks will pay you a much more attractive amount of income today with plenty of potential for your wealth and income to grow over time.
Here’s an example…
Verizon Communications Inc. (VZ) currently pays a quarterly dividend of $2.51 per share. Compared to the current stock price near $59.25, the dividend payment gives you a yield of 4.2%.
That’s a much higher yield than what you can get on a 10-year treasury bond!
The best part about investing in an income play like VZ is that the price of the stock can trade higher over time as the company’s profits grow.
And VZ has a history of increasing its dividend over time. So if you continue to hold your shares, your income will naturally grow.
Making the New Ratio Work for Your Retirement
Once you have 60% of your retirement invested in these income plays, you can use the other 40% for more speculative plays that can lead to bigger home run returns that will boost your wealth.
Using a smaller portion of your wealth to invest aggressively can pay off over time.
Yes, you need to be careful with these speculative positions. It’s still important to diversify your positions and never bet too much on any one play.
But investing a small percentage of your wealth into a new buyout play, a stock with revolutionary technology, or an option contract on a fast-moving opportunity can hand you triple-digit gains in a short amount of time.
And with those gains in hand, you can re-invest some of your profits into the income-generating portion of your retirement, giving you even more cash to enjoy during your retirement.
Of course, you can adjust the 60/40 ratio to best meet your retirement needs.
Some retirees may want to allocate 70% or 80% to income plays, while others may lean toward more risk and allocating more to speculative growth opportunities.
Do what makes sense for your retirement. But make sure to avoid the traditional 60/40 strategy rule that’s putting so many retirees at risk.