Retirement accounts need balancing as you age
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.