The attached Money article recommends about 50% in stocks at the start of retirement. I agree with that, but their methodology to arrive at that conclusion is confusing. Don't they leave out the possibility that you could be putting your money in stocks right before the market drops 50% like it did in 2000?
thanks for any input,
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Why It Pays to Put More Stock in Retirement
Contents
Understand the Real Payoff.
MORE STOCKS, MORE SECURITY
With more pop in your portfolio, you create a cushion for medical bills, emergencies and, yes, a little fun
It's an accepted tenet of retirement planning: You need to stay invested in stocks--keeping, say, 30% or more of your investments in equities--if you want your savings to last the three decades or more you may need it for income once you stop working. And that's sound advice, to be sure--but not just for the reason experts usually give.
As it turns out, putting a substantial stake in stocks doesn't necessarily make your money last longer, but it does add mightily to your financial security. That's because the higher returns typical of a heavier stock mix help maintain your savings at a higher level, which gives you greater flexibility in spending and a bigger cushion against misfortune as you age.
Understand the Real Payoff.
Say you retire with a $500,000 portfolio, from which you plan to withdraw 4% to start and up that amount by 3% a year for inflation. As the chart shows, the chances that your savings will last 30 years are virtually the same whether you invest 20% of your money in stocks or 50%.
Pumping up the volume on equities, however, does make a big difference to the total amount of money you have. With half your assets in stocks, you have a 75% chance that your portfolio will be worth $190,000 after 30 years. With 20% in stocks, you're likely to have just $90,000.
Consider the "What Ifs." One obvious advantage to having the larger stash is that you'll still have enough money to support yourself if your retirement exceeds 30 years. That's a distinct possibility if you retire early or live well beyond your life expectancy.
But there's another big benefit. A larger pool of assets amounts to an insurance policy of sorts that can, for instance, help pay your medical expenses later in life--a huge plus given the rampant inflation in health-care costs over the past decade and the sharp drop in the number of employers offering retiree medical coverage. A financial cushion can also reduce your chances of having to seek financial help from your kids or other family members-a major fear among retirees, according to a survey from global bank HSBC.
And if nothing else, a nice reserve would give you some wiggle room if you ended up spending more in retirement than you'd anticipated, and could even allow you to indulge in the occasional splurge.
Don't Overdo It. But beware: Investing too heavily in stocks can backfire. Since share prices can be decimated in severe or sustained market downturns, the chance that an all-stock or nearly-all-stock portfolio will last 30 or so years is actually lower than for a portfolio just half committed to stocks.
The right balance, according to Ned Notzon, chairman of T. Rowe Price's asset-allocation committee, is to start off with 40% to 60% of your portfolio in stocks at retirement. Then, as you age, gradually ratchet down your stockholdings until they represent 20% to 30% of your assets by the time you're in your eighties.
In short, take the Goldilocks approach: not too light on stocks, but not too heavy either. That way your money should last a lifetime, with enough left to cover unforeseen expenses and, if you wish, to leave some dough to your undoubtedly deserving heirs as well.
Sign up for Updegrave's weekly e-mail newsletter at money.com/expert. E-mail him at longview@moneymail.com.
MORE STOCKS, MORE SECURITY
An equity-light portfolio and one split between stocks and bonds should each last 30 years, but the fifty-fifty mix provides a larger cash cushion as you age.
START WITH $500,000 INVESTED LIKE THIS:
--------------------------------------
20% stocks
80% bonds and cash
ODDS MONEY WILL LAST 30 YEARS:
-----------------------------
92%
AMOUNT YOU'LL LIKELY HAVE LEFT AFTER
------------------------------------
20 years: 30 years:
$245,000 $90,000
START WITH $500,000 INVESTED LIKE THIS:
--------------------------------------
50% stocks
50% bonds and cash
ODDS MONEY WILL LAST 30 YEARS:
-----------------------------
92%
AMOUNT YOU'LL LIKELY HAVE LEFT AFTER
------------------------------------
20 years: 30 years:
$305,000 $190,000
PHOTO (COLOR)
thanks for any input,
*********************************************************************************
Why It Pays to Put More Stock in Retirement
Contents
Understand the Real Payoff.
MORE STOCKS, MORE SECURITY
With more pop in your portfolio, you create a cushion for medical bills, emergencies and, yes, a little fun
It's an accepted tenet of retirement planning: You need to stay invested in stocks--keeping, say, 30% or more of your investments in equities--if you want your savings to last the three decades or more you may need it for income once you stop working. And that's sound advice, to be sure--but not just for the reason experts usually give.
As it turns out, putting a substantial stake in stocks doesn't necessarily make your money last longer, but it does add mightily to your financial security. That's because the higher returns typical of a heavier stock mix help maintain your savings at a higher level, which gives you greater flexibility in spending and a bigger cushion against misfortune as you age.
Understand the Real Payoff.
Say you retire with a $500,000 portfolio, from which you plan to withdraw 4% to start and up that amount by 3% a year for inflation. As the chart shows, the chances that your savings will last 30 years are virtually the same whether you invest 20% of your money in stocks or 50%.
Pumping up the volume on equities, however, does make a big difference to the total amount of money you have. With half your assets in stocks, you have a 75% chance that your portfolio will be worth $190,000 after 30 years. With 20% in stocks, you're likely to have just $90,000.
Consider the "What Ifs." One obvious advantage to having the larger stash is that you'll still have enough money to support yourself if your retirement exceeds 30 years. That's a distinct possibility if you retire early or live well beyond your life expectancy.
But there's another big benefit. A larger pool of assets amounts to an insurance policy of sorts that can, for instance, help pay your medical expenses later in life--a huge plus given the rampant inflation in health-care costs over the past decade and the sharp drop in the number of employers offering retiree medical coverage. A financial cushion can also reduce your chances of having to seek financial help from your kids or other family members-a major fear among retirees, according to a survey from global bank HSBC.
And if nothing else, a nice reserve would give you some wiggle room if you ended up spending more in retirement than you'd anticipated, and could even allow you to indulge in the occasional splurge.
Don't Overdo It. But beware: Investing too heavily in stocks can backfire. Since share prices can be decimated in severe or sustained market downturns, the chance that an all-stock or nearly-all-stock portfolio will last 30 or so years is actually lower than for a portfolio just half committed to stocks.
The right balance, according to Ned Notzon, chairman of T. Rowe Price's asset-allocation committee, is to start off with 40% to 60% of your portfolio in stocks at retirement. Then, as you age, gradually ratchet down your stockholdings until they represent 20% to 30% of your assets by the time you're in your eighties.
In short, take the Goldilocks approach: not too light on stocks, but not too heavy either. That way your money should last a lifetime, with enough left to cover unforeseen expenses and, if you wish, to leave some dough to your undoubtedly deserving heirs as well.
Sign up for Updegrave's weekly e-mail newsletter at money.com/expert. E-mail him at longview@moneymail.com.
MORE STOCKS, MORE SECURITY
An equity-light portfolio and one split between stocks and bonds should each last 30 years, but the fifty-fifty mix provides a larger cash cushion as you age.
START WITH $500,000 INVESTED LIKE THIS:
--------------------------------------
20% stocks
80% bonds and cash
ODDS MONEY WILL LAST 30 YEARS:
-----------------------------
92%
AMOUNT YOU'LL LIKELY HAVE LEFT AFTER
------------------------------------
20 years: 30 years:
$245,000 $90,000
START WITH $500,000 INVESTED LIKE THIS:
--------------------------------------
50% stocks
50% bonds and cash
ODDS MONEY WILL LAST 30 YEARS:
-----------------------------
92%
AMOUNT YOU'LL LIKELY HAVE LEFT AFTER
------------------------------------
20 years: 30 years:
$305,000 $190,000
PHOTO (COLOR)
