Re­tire­ment ac­counts need bal­anc­ing as you age

The Island Packet - - The Long Read - BY JOHN SCHWARTZ New York Times

There might be noth­ing wrong with it at the mo­ment – you prob­a­bly have some ter­rific in­vest­ments. But a re­tire­ment ac­count has to shift its bal­ance as you age.

When we are young, it is best to be ag­gres­sive. Stocks, stocks and more stocks will en­sure that your port­fo­lio grows. Even though stocks rise and fall, over time they are the best way to build a nest egg. But as you get closer to re­tire­ment, you need to shift your port­fo­lio to re­duce the amount de­voted to those volatile stocks, since a plunge at a mo­ment when you can least af­ford it could slash the sav­ings that you need to live on.

So at that stage in your life, ex­perts sug­gest you load up on bonds, which tend to fluc­tu­ate less, and ex­tremely sta­ble in­vest­ments like money mar­ket funds. Bonds do not earn as much as stocks do, gen­er­ally, and they can cer­tainly de­cline as in­vest­ments when mar­kets slump. But they won’t plunge nearly as much as stocks – and some­times they even go up when stocks go down.

“If you are still work­ing, then you can be very ag­gres­sive,” said Tom Fredrickson, a cer­ti­fied fi­nan­cial plan­ner in Brook­lyn. When stocks go down, be­ing in­vested in stock funds means you are buy­ing them more cheaply. That kind of risk-tak­ing should slow con­sid­er­ably within five years of end­ing your em­ploy­ment, he warned. “At the be­gin­ning of re­tire­ment, you shouldn’t be 100 per­cent in stocks.”

He ex­plained the math: If you suf­fer a stock mar­ket fall that re­duces the value of your stock hold­ings by 50 per­cent, “you’ve got to make 100 per­cent to get back your 50 per­cent.” And if you are pulling money out of the ac­count to pay for day-to-day ex­penses by then, “you’re go­ing to go broke quickly.”

There is an old rule of thumb for as­set al­lo­ca­tion: Sub­tract your age from 100, and the re­sult­ing num­ber is the per­cent­age of your in­vest­ments you should have in stocks. Be­cause peo­ple live longer than they used to, and be­cause in­vest­ments like Trea­sury bonds do not pay as much as they used to, rule-of-thumb watch­ers have re­vised the num­ber to sub­tract from 110 or even 120.

De­pend­ing on your stom­ach for risk, you might hold on to your stocks even longer.

Stay­ing in the stock mar­ket very late in the game is smart only if you are wealthy enough, or, say, have the sta­bil­ity of a pen­sion or the ex­pec­ta­tion of an in­her­i­tance, and “the mar­ket is just a game for you,” Fredrickson said.

Fi­nan­cial plan­ner Sh­eryl Gar­rett lives in Arkansas and of­ten rec­om­mends that her clients take a close look at “tar­get date funds” that au­to­mat­i­cally ad­just over time to bal­ance risk and re­ward, be­com­ing more con­ser­va­tive as the client nears the date of re­tire­ment. She said that she pre­ferred low-cost funds like the Van­guard Life Strat­egy funds be­cause of the low costs and low tax im­pact, but said she had seen sim­i­lar of­fer­ings from many other com­pa­nies, in­clud­ing Bet­ter­ment and Charles Sch­wab.

The most im­por­tant thing about tar­get funds, she said, is the set-it-and-for­get it peace of mind that they can bring. “I am a fan of re­bal­anc­ing or think­ing about re­bal­anc­ing, on an an­nual ba­sis,” she said. But she also knows that her cus­tomers are busy and har­ried. And tar­get funds re­lieve them of some of that bur­den.

In her own life, Gar­rett said, in­vest­ing has be­come much more con­ser­va­tive lately. Self­em­ployed, she knows that busi­ness can slip, and that life is un­cer­tain; her spouse, who runs a cabin rental busi­ness in north­west Arkansas, re­cently re­ceived a can­cer di­ag­no­sis. Look­ing at all of that, she said, “I felt I wanted a lit­tle more sta­bil­ity in my world.”

That meant mak­ing more con­ser­va­tive in­vest­ments for her­self than she ad­vises for some clients. So her re­tire­ment fund is at a low 20 per­cent eq­uity, half what it had been for years. At the rule of thumb of 100 mi­nus her age, her stocks should make up 45 per­cent of her port­fo­lio.

“I need to stress less about what’s go­ing on in fis­cal mar­kets,” she said. “I de­cided I didn’t have the ca­pac­ity, the tol­er­ance, for los­ing money – I was ac­tu­ally fine with see­ing a minute re­turn.”


Re­tire­ment plan­ner Sh­eryl Gar­rett, left, shown with her spouse, Shawnda, in Eureka Springs, Ark., of­ten rec­om­mends “tar­get date funds” that au­to­mat­i­cally ad­just over time to bal­ance risk and re­ward.

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