Reddit Tears Down One Person’s Wild Retirement Plan: ‘You’ll Be Holding Junk’

It’s normal for people to create retirement plans as they build wealth and think about how different life will be when they can no longer work. Some people aim to retire and gain financial independence earlier so they have more flexibility with their lives.

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Each person has a different path to get there and some people share their portfolios and plans on Reddit. A recent /Fire Reddit post generated a lot of strong reactions from commenters who suggested a different approach. “You’ll be holding junk,” one of the commenters, stonkDonkolous, said.

Is the post’s proposed portfolio and plan really that bad? The post and comments offer valuable lessons for long-term investors.

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The Retirement Plan

The original poster said they are considering buying U.S. Treasuries that mature in 2041 at face value. These bonds offer 4.75% APY and the investor viewed it as a way to grow their money while adhering to the 3% withdrawal rule.

On paper, the bonds would generate enough cash flow to cover living expenses if the Redditor only needs to withdraw 3% each year. Bond yields haven’t been this high for a while and the prospect of lower interest rates in the future may mean that this opportunity will vanish soon.

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Inflation Ruins the Plan

Things that look good on paper don’t always translate into real results and inflation is the monkey wrench in this equation. Many commenters pointed it out and cautioned that inflation can grow much faster than 4.75% per year, especially for items that you may need the most.

One commenter said inflation is the major issue looming over everything right now — calling it an 800-pound gorilla in the room. The user said the original poster’s strategies simply won’t generate enough growth to outpace inflation over the long term.

While many people use core inflation to look at inflation’s growth rate over time, this metric notably leaves out energy and food. In other words, if core inflation arrives at 2%, your expenses can still be up by well more than 2% by the end of the year.

It’s also important to remember that the interest you receive from the U.S. Treasury bonds is treated as ordinary income. You will end up with a higher tax rate if you receive cash flow from bonds than if you opted for dividend stocks instead.

Taking Some Risk for a Higher Return

Some commenters pointed out that bonds can be part of a portfolio but shouldn’t encompass the entire strategy. Furthermore, you can incur more risk with stocks and index funds for the potential of higher returns.

Those higher returns can make a big difference if your annual costs go up by more than 4.75% per year in the future. Bonds look more promising during economic contractions and negative headlines that warn of an impending stock market crash. However, benchmarks like the S&P 500 and Nasdaq Composite have soundly outperformed bonds during that time.

It’s important to assess how much risk you can tolerate. Even if the investor is very risk-averse, most investors were against loading up on 4.75% APY bonds that mature in 2041.

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This article originally appeared on GOBankingRates.com: Reddit Tears Down One Person’s Wild Retirement Plan: ‘You’ll Be Holding Junk’