2/13/2014 6:30 PM ET|
3 new ideas on retirement investing
Some experts say it's time to rethink the nest egg. Here are three new strategies to prolong your portfolio's golden years -- all of which favor owning more stocks.
Experts are starting to rethink how much stock people should hold in retirement.
In general, the new thinking goes, people should be more heavily invested in equities than is suggested by some traditional rules of thumb, such as subtracting one's age from 100 to determine a portfolio's stock allocation. One new, and controversial, theory even goes so far as to suggest that stock exposure should increase the further one moves into retirement.
What hangs in the balance: whether 78 million baby boomers can generate sizable enough returns, without taking on too much risk, to create income streams that last as long as they do.
Here are three different approaches financial experts are pushing, all of which conclude that people should be investing more heavily in stocks -- even after they've collected the gold watch.
First reduce, then increase equity allocation over time
One of the biggest risks in using investments to fund retirement is what's called "sequence of returns" risk. If you retire and your investments take a big hit during the first few years you're making withdrawals, the money will run out years earlier than if you have decent returns earlier and suffer through a market downturn later.
To combat the problem, two researchers recently crunched the numbers and concluded that, in many cases, investors should dial back their stock holdings to between 20 percent and 50 percent at the start of retirement and then ramp them back up by one percentage point a year to between 40 percent and 80 percent throughout retirement. For example, a portfolio that starts at 30 percent in stocks and finishes at 60 percent performs better on average than one that starts and finishes with 60 percent stocks.
"You want to have the lowest stock allocation when your portfolio is largest, and that's going to be right before and after retirement," says Wade Pfau, a retirement-income professor at American College in Bryn Mawr, Pa., who did the research with Michael Kitces, research director of Pinnacle Advisory Group in Columbia, Md. "That's when you're most vulnerable to losing wealth. Once you transition into retirement, you no longer have as much ability to change your plans and make it back up."
The researchers describe their asset-allocation recommendation as a "U-shaped glide path," where stocks start as a large share of the portfolio, decline, and then are increased over time. Ideally, the researchers say, they would like to see their recommendation incorporated into the asset allocations used by target-date funds, which base their allocations on retirement dates and ages in an attempt to allow investors to put their investment goals on autopilot, Pfau says.
So far, though, target-date funds, at best, keep a fixed portion of assets in stocks through the retirement years, and most have a declining share in equities. "They're exposing you to potentially worse outcomes by having a declining glide path in retirement," Pfau warns.
Says Kitces: "If I say, 'You're going to invest more in equities later in retirement,' everyone freaks out." But he and Pfau say retirees' actual behavior in the past, when more people relied on traditional pensions, matches up to their findings.
People funding their fixed costs with a combination of a pension and Social Security or other annuity payments sometimes invested much of the rest of their assets in stocks, Pfau says. So, as they aged and the remaining value of those fixed-income sources effectively declined, they essentially had more of their investments in stocks.
Divide assets into five buckets that can last 30 years
For years, many financial planners advised investors at retirement to weight their portfolios heavily to bonds. Some now argue that the main underlying assumptions behind that recommendation no longer apply.
For one thing, "we're ending a 30-year bull market in bonds," says Lisa Shalett, head of investment and portfolio solutions for Morgan Stanley Wealth Management. For another, the investment horizon for most retirees has lengthened to 30 years from 10, along with the general rise in longevity for the U.S. population. And lastly, the shift from pension plans to 401k retirement plans has more retirees depending on investment gains for income.
"You put those three things together, and what it says is we need a new approach," Shalett says. Bonds can no longer be counted on as the driving engines in portfolios that may have to last three decades.
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I have social security and a well funded defined benefit pension from a traditionally conservative state government, where I have been employed for over four decades. My IRA, deferred comp etcetera is 100 percent in equities. I figure that the only possibility for growth is in stocks. Social security and the pension are essentially annuities, although SS has an annual COA, making it a much better deal than any insurance product.
It is certainly reasonable to keep assets in stocks, but the "bucket" method and the "U-shaped glide path" are both virtually impossible for even a skilled individual to pull off. It would require a very attentive and likely very expensive advisor. And a very large portfolio....
Here's a more realistic approach. Base your exposure on your health and life expectancy- better health, longer life, more stocks. Look at growth, particularly dividend growth and at higher yielding stocks like MLP's. Be creative with bonds - there are good quality unrated bonds out there yielding 6% plus tax exempt. Fill in the gaps with low cost mutual funds from V or F. And stay away from brokers and money managers unless you know exactly how much they will cost you.
The majority of the retired folks I know retired with a three legged stool. PENSION,SAVINGS,INVESTMENTS! The majority of the younger folk I know have no pension,make a lower wage than the older folk did(2 tier wages),therefor have less to save if they could anyway,there for their income is smaller so they put less money into social security! Not to mention when the young folk started out they put a higher % of their income into social security and they never reached the cap on income to get out of paying social security ( thanks to Ronny Raygun ) Americas future looks like a train wreck. There won't be any golden years for most and definately not a beach house in Florida! When you kick a leg or two off the stool you simply cannot retire.
...and Caesars Palace says retirees with money should 'invest' in their games of chance - at least you'll have more fun as your money sucked up (and comped a drink or two as you do it) instead of letting the investment houses suck it up by whatever financial gamble they think of next and leaving you to bail them out because they are so much smarter than the rest of us
Honestly - with the salaries and the bonuses they are reaping I do not know how any of us can still believe they have their customers goals at heart.
PS - how many pension fund managers bought these lines of crap and are now underfunded or been taken over by the government (taxpayer)? a lot!
My rule of thumb is if I do not anticipate needing money for over 5 years, it is in equities and hiyield bond funds. We live off SS, one small state pension, rents from two mortgage free properties and a small income from my part time consulting job. So right now, everything is invested long term as we need no other cash.
It also helps us that we are totally debt free. For most people, the best thing you can do is live totally debt free. The nonsense that "let the government pay some of your interest expense on a mortgage" is nonsense. Spending a dollar to save a quarter or less for most people is stupid. And where else can you get a 4-6% or more risk free rate of return than paying off your mortgage?
It also puts all stocks in one category, all bonds in one category, etc.
If you know you won't have enough without significantly investing in stocks, then you might look at something like a diversified set of Blue Chip dividend-paying stocks with long records of steady growth like General Mills, Procter & Gamble, Abbott Labs, etc. Of a fund that has such an allotment. Studies show losses over a decade from such an investment strategy have very little chance of losing money.
If you know you've got enough to live comfortably to 100 with 2% returns, you'd be foolish to risk a majority of it in stocks. But if you have it in bonds, what kind? Municipal? Treasuries? Junk? And how much should you ladder them? That's a whole topic within itself.
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