Is a pension a stand-in for bonds?

@Money January 12, 2012: 5:20 AM ET

NEW YORK (CNNMoney) -- Our 401(k) and Roth investments are in stock index funds and commodities. We own no bonds. With a pension and Social Security, can we keep forgoing bonds? -- D.F., Washington, D.C.

Because your Social Security and traditional pension will churn out a steady income that's similar to the interest payment on a bond, you could theoretically go 100% stocks.

chart-bonds-belong.gif

Whether you should depends on how you answer two questions.

The first is how much of your retirement expenses will be covered by Social Security and your pension. You can get the answer by consulting a budgeting worksheet, such as the interactive one that's part of Fidelity's Retirement Income Planner tool.

If it's all or nearly all and you're not depending on your investments for income, you can skip bonds, in theory. "Even if you ran into a string of 2008-size losses," says Morningstar global chief investment officer Tom Idzorek, "you would still have enough income to maintain your living standard."

What's wrong with a stock-heavy mix?

If you're fortunate enough to find yourself in that position, you still have to deal with this second question: How much are you willing to see your retirement savings sink?

Conditions in the stock market can get ugly fast.

This past decade began with a 49% price drop and ended with a 57% one. So even with what Idzorek refers to as the "capacity" to bear the risk of an all-stock portfolio, you have to decide whether you have the tolerance: Could you sleep at night knowing that you could lose half of your savings?

Assuming the answer is no, you need to own bonds too.

Of course, very few retirees are lucky enough to cover all their expenses with a pension and Social Security. When you depend on your portfolio to provide any part of your income, you need to settle on a stock and bond mix that safely provides a sufficient payout.

Ask the Help Desk your money questions

As you can see in the graphic, a retiree who expects half his income to come from a pension and Social Security can go with a stock-heavy portfolio. But the more you devote to stocks, the greater the hit you'll take when the market tanks. And no pension will change that.

Adding more bonds won't hurt the chances your money will last -- and could help you sleep better. To top of page

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