Managing Your Money In Retirement

By Robert Rapier, Investing Daily, Monday, May 3

An old adage that happens to be timeless advice is to become more conservative with your investments as you approach retirement age. Although it’s true that aggressive stocks perform best over the long term, sometimes there are extended periods of negative performance.

For example, if your entire nest egg were invested during the 1929 U.S. stock market crash, which helped trigger the Great Depression, it would be 25 years before share prices regained their pre-crash highs.

It has been even worse in Japan. The Nikkei Stock Average peaked on Dec. 29, 1989. The next 20 years would see its value plunge as much as 80%. Today, more than 30 years later it is still 25% below the 1989 peak value.

Those are scary numbers and to be honest they would decimate the retirement plans of the vast majority of us. But this is one reason that your investment mix should shift over time.

An old rule of thumb was that the percentage of your portfolio that you should keep in stocks is your age subtracted from 100. So if you are 20, you should keep 80% of your portfolio in stocks. If you’re 60, you should keep 40% of your portfolio in stocks.

But Americans are living longer than they once did. A person born today has a life expectancy more than eight years longer than someone born 30 years ago. Thus, financial planners have started to recommend modifying the above rule to be as much as 120 minus your age. That would suggest that if you are 20, you should be fully invested in stocks (and remain invested to ride out the bear markets) and at 60 you should still have 60% of your portfolio in stocks.

What about the remainder of your portfolio? It is certainly difficult to get excited about bonds right now. The 10-year Treasury yield is still hovering around 1.6%, which won’t even keep up with inflation. You can find some good 10-year corporate bonds yielding 2.5%, which at least keeps pace with inflation.

In Warren Buffett’s annual letter to his shareholders, he indicated he isn’t impressed by bonds these days. He wrote:

“Bonds are not the place to be these days. Can you believe that the income recently from a 10-year Treasury bond, the yield was 0.93% at yearend, had fallen 94% from the 15.8% yield available in September 1981? In some large countries like Japan and Germany, sovereign yields are negative. Fixed-income investors worldwide, whether pension funds, insurance companies or retirees, face a bleak future.”

There aren’t a lot of enticing options for the non-stock portion of your portfolio. I would endorse having part of that “non-stock” allocation in real estate or precious metals, even though the easiest way to do this is through stocks or mutual funds. Allocations into those sectors should be more resilient and not as strongly influenced by a bear market impacting the broader markets.

Nevertheless, one piece of advice I often give to people is “The upside potential doesn’t matter if you can’t afford the downside risk.” For a retiree, that means “Don’t risk money that you can’t afford to lose.”

It may be enticing to over-allocate into a stock market sector that generated a 20% annual return last year, but if the stock market crashes you will appreciate the money stored safely in that 2.5% corporate bond.

So, if you haven’t paid attention to your allocation lately, and you are in or approaching retirement, it may be time to do a portfolio checkup and reallocate as needed.

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