At nearly 47 years old I cannot for the life of me find a good reason to invest nearly half my retirement savings in something with as limited a growth as bonds. Security is one thing, fear of losing it all is another. I still have a good many years before retirement and even if I do someday decide to retire early I can always move more assets to the bond fund at that time.

For example, if you have $1,000 to $3,000 it recommends the STAR fund because that’s all you could get.

$3,000 up to various amounts (depending on your stock allocation) it recommends either a Target Retirement fund or a portfolio that builds up to the more complex small-cap and value tilted portfolio. (You can’t invest in it right away because of the fund minimums.)

Finally, when you have enough to invest that you reach $100,000 in a fund, it recommends you use the Admiral shares instead of the Investor shares for lower expenses. (Note how the ticker symbols and fund #’s change as you increase the amount available to invest.)

Anyway, I thought it was pretty slick and useful, and I thought you’d like those features.

Thanks for including the link and for the compliments on the calculator.

The calculator itself uses the data from hundreds of thousands of Monte Carlo simulations, so the real question is what are the assumptions of those simulations.

1. Inflation will average about 3.5% in the future. (That’s just a little higher than the historical average.)
2. You invest in a portfolio that’s allocated with (120 – your age)% in stocks. No changing for valuations. (Sorry, Rob.)
3. You invest in a diversified portfolio similar to the ones recommended by my free Vanguard portfolio allocation calculator (published today).
4. The future average return and standard deviation for these portfolios will be the same as the historical average return and standard deviation.

Those are the main assumptions that you can’t really see in the calculator. The rest of the assumptions depend on what you stick in the calculator!

I’m grateful to you for sharing your thoughts, Dylan. It would be a responsibility on my head that I do not want to carry if I were to put forward my views and if community members who have differing views were to fail to share them with others in the community. This way people get to hear both sides of the story.

Rob

I’m not really interested in debating the merits of your idea, I just wanted to establish that it is as much an oversimplification as theses other rules of thumb. And in my opinion, it’s potentially much more dangerous.

We’re in complete agreement re this point, Dylan.

At a P/E10 level of 15, the most likely long-term return on stocks is 5.6 percent real. That’s an exciting return. There is obviously no need to lower your stock allocation just because we have gone a bit above fair value.

My objection to the Passive Investing model is that it argues that investors never need to change their allocations in response to price changes. That’s an extremist viewpoint, in my assessment. At the top of the bubble, the most likely long-term return was a negative number. When the long-term return goes negative, an allocation adjustment is called for, in my view. And that’s so regardless of whether the investor is 25 or 65.

Rob

http://www.providentplan.com/465/how-much-should-i-save-for-retirement-part-3-how-much-should-i-save-each-year-free-retirement-calculator/

Paul: I’m curious, what are the assumptions used for the calculator? Nice job by the way. Very easy to use.

I strongly agree with you about the 10% rule. I don’t know if you noticed my comment on Get Rich Slowly about that issue, but that’s why I made the free retirement calculator I have on my website. I worked out a way to take most of the factors you point out into account, and I did a lot of work to create a calculator that would work for people in a variety of situations.

I won’t link to it on here, but if you’d like me to I can. It’s easy enough to find in the article you linked to on Get Rich Slowly.

As far as the bond allocation goes, I’ll have to agree with Rick. I personally think going with something like (120 – your age) for your stock allocation is a bit better. But I won’t even be following that guideline. I’ll keep my portfolio in 100% stocks until I’m 20-25 years from retirement. Then I’ll switch over to the (120 – your age) rule of thumb.