REITs Complement Equity and Fixed Income Retirement Strategies
REITs extend the lives of portfolios based on equity-oriented strategies, but provide even greater benefits for portfolios based on fixed income strategies.
Source: © 2007 Morningstar.
The chart above illustrates the likelihood of a portfolio lasting through the course of a 30-year retirement, given annual withdrawals at constant, inflation-adjusted rates. A 65-year-old could take 5 percent annual withdrawals from a portfolio allocated to 45 percent stocks (represented by the S&P 500), 45 percent bonds (represented by the 20-year U.S. government bond) and 10 percent cash (represented by the 30-day U.S. Treasury bill) and have a 64 percent likelihood that the portfolio would fund a 30-year retirement.
Reducing the stock and bond allocations to 40 percent each and adding a 10 percent allocation to REITs (represented by the FTSE NAREIT Equity REIT Index) would boost the likelihood of the portfolio lasting until the retiree’s 95th birthday to 75 percent. Reducing the stock and bond allocations further to 35 percent each and increasing the REIT allocation to 20 percent would increase the likelihood of the portfolio’s lasting 30 years to 83 percent.
Source: © 2007 Morningstar.
The chart above shows the even more dramatic ability of REITs to supplement fixed income strategies and extend the lives of these portfolios. A 65-year-old retiree taking an inflation-adjusted 5 percent annual withdrawal from a portfolio based on 90 percent bonds and 10 percent cash could expect only a 16 percent likelihood that the portfolio would last until his 95th birthday. However, reducing the bond allocation to 80 percent and adding a 10 percent allocation to REITs would nearly double the portfolio’s chances of lasting 30 years. Reducing the bond allocation to 70 percent and adding a 20 percent REIT allocation to the portfolio would more than triple its chances of funding a 30-year retirement.