Insurance

BULLS & BEARS: Conservatism could spoil final years of retirement

November 27, 2006

A 65-year-old, recently retired couple came into our office the other day seeking advice on portfolio allocation.

The husband had a 401(k) rollover with $1 million in it and wanted to take out $50,000 a year for income.

Within the first few minutes of the meeting each said, "We can't afford to take much risk with this money because we won't make any more, and it's all we will ever have."

Followed by, "We can't afford the risk of the stock market with any more than 35 percent of the portfolio."

As one spoke, the other would nod in agreement.

"Where did you get the 35-percent-allocation-to-stocks number?" I inquired.

"At a retirement seminar, a financial planner told us to use our age as the percentage we should put in bonds and CDs," she replied, "And then the rest we could afford to risk in the market." Using this formula, a person's average weighting in stocks would be only 20 percent in their golden years. "I hope your children really, really love you and are making a lot of money in 30 years," I responded. In unison, they tilted their heads the other way and asked why I would say that? I explained that, according to insurance mortality tables, for a couple age 65, there is a 50-50 chance one would live to age 92 and one-in-four odds one would make it to 97. Their million dollars may have to last 30-plus years. Fidelity Investments recently shared with me a hypothetical retirement income scenario, which fit this situation perfectly. Fidelity tested a $1 million retirement account in which an inflation-adjusted $50,000 was withdrawn annually.

Its test used returns for stocks, bonds and cash since 1926 and used different allocations to each.

The portfolio-survival test was repeated 3,000 times over random time periods to average results.

The results showed that, no matter what the mix was, most portfolios would last 20 years, until age 85.

But the next 10 years, from the age of 85 to 95, is where the children's love was tested. The "can't afford risk" portfolio with only 25 percent in stocks ran out of money nine out of 10 times by the age of 95.

This conservative portfolio didn't even make it to 90 half the time.

Happy 90th birthday! You are broke and reliant on your kids to pay your nursing home bills!

That's a nice reward for being careful and conservative your whole life, isn't it?

Trust me, your kids won't pay. Instead of burning through their savings, they'll move you to some smelly place Medicaid covers.

In contrast, the "risky" portfolio-with 75 percent in stocks-nearly always made it to age 90 and even surpassed age 95 three out of four times.

If you want your years to be more golden and your kids to come around with smiles on their faces, stick with much more in stocks than bonds.

It's true that money isn't everything, but it sure keeps the children in touch.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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