My problem is I don't like risk. The tax deferred accounts have worked great for us to date - only averaging 5%, but it was a guaranteed rate. The principal was protected. Just got notice that starting next month, the rate is going to be tied to the ten year treasury bond. As soon as I retre, that money's getting rolled over into something else lol.
I think you don't like volatility?
The fact is, that if you want a portfolio to survive for several decades AND keep up with inflation, you are probably going to have to live with the volatility associated with owning some "risky" assets. If people have such a huge portfolio that they can live off the interest, and say put the a big chunk of interest back to help the portfolio keep up with inflation, then they can keep the money in guaranteed assets and do fine.
In your case of guaranteed 5%, you can get away with a 2.5% withdrawal rate assuming inflation is 2.5%. If you can live off that fine. Most people have a hard enough time saving a big enough portfolio to withdraw only 4%, let alone 2.5%. And as you say - if that guaranteed % drops in the future, you may not be able to withdraw enough to live on after inflation! Right now, outside of "guaranteed income" funds, most "safer" fixed income investments are paying less than the current inflation rate. Today the 10-year treasury is paying under 2.3%.
Another choice is to buy an immediate annuity to guarantee some base level of monthly income (and ideally indexing it to inflation and covering the spouse too if married). This solution tends to be very expensive in comparison to living with volatility. But maybe not as expensive as keeping all in a guaranteed income fund? I don't know.
So, what if your portfolio is not big enough to support such a low withdrawal rate? What do you do then? You have to own some riskier assets.
To look at the "big picture" you really have to look at a several decades - 3 decades at a minimum, IMO, if you are 65 or less, probably 4 decades min for early retirees in their mid-50s. Look at what happens in the long run if you don't have investments that keep up with inflation.
Here are a couple of references that might help you understand the longer-term view better:
This one looks at withdrawal rates and stock allocation, among several other very useful charts:
Pensions, Retirement Planning, and Economics Blog: William Bengen's SAFEMAX
This one looks at volatility versus different stock/bond allocations:
http://www.merriman.com/PDFs/FineTuning.pdf
Volatility is very scary in the short term. It's not so bad in the long term. If it causes you to panic and sell out at the bottom and go all cash, then that's bad, and you probably shouldn't be managing your own portfolio.
Some people use balanced funds to keep them a little more isolated from market variations. This is a perfectly good solution for many folks as long as they can truly leave the portfolio alone and not try to second-guess the fund manager. Vanguard Wellesley Income Fund VWIAX, a well-respected balanced fund of about 60% bonds/ 40% stocks, is currently yielding about 2.96% in the Admiral Shares (the lowest cost version of the fund). It yielded more when interest rates were higher. If you can live on a withdrawal rate around 3%, this may be a good solution for you.
Some people (yours truly included) keep a few years of expenses in cash or near cash to help cushion us from day-to-day market volatility of our retirement portfolio. But the bulk of our retirement portfolio remains in riskier assets than cash or near-cash.
Audrey
