By Howard Gold, MarketWatch
You’ve put money aside for retirement year after year, sometimes the max, sometimes less when you had expenses to pay. You’ve invested it well, so now you have a good enough nest egg to carry you through the next phase of your life — retirement.
There are plenty of vehicles aimed specifically at investing for retirement, especially target-date funds, where fund managers reduce your stockholdings as your chosen retirement date draws near.
But once you get there, the only certainty is that you’ll have to draw down the assets you’ve accumulated in your traditional IRAs and 401(k)s through required minimum distributions (RMDs) starting the year after you turn 70½.
Before you retire, you should see a reputable financial planner to sort it all out, but many investment advisers are stuck in old thinking and conventional wisdom about how to invest it.
So, I’m going to suggest how you can do it yourself. The goal is to set up a stream of income that will last the rest of your life, the “personal pension” we’ve been writing about in Retirement Weekly over the last few months.
But first, let’s talk more broadly about how to approach investing in retirement
Retirees face four kinds of risk.
First is the risk that inflation will erode their nest eggs over time.
Second is that rising interest rates will cut into stock returns and reduce the value of their bondholdings. (The other side of the interest rate coin is deflationary negative interest rates, which plague Europe and Japan, driving yields down for savers all around the world.)
The third risk is that not having enough growth in your portfolio will cause you to run out of money.
And finally there’s what academics call “sequence of returns” risk — that you’ll retire just when a bear market hits, depleting the nest egg from which you calculate your withdrawals.
The risks of inflation and higher interest rates seem remote now, but the risk of outliving your money is real and 10 years into a bull market, with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.44% and S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.38% at or near all-time highs, hundreds of thousands of baby boomers may well retire in the teeth of the next bear.
You counteract longevity risk by owning stock. You combat “sequence of returns” risk by owning the right amount of stock and holding plenty of cash.
What is the magic number? According to the Employee Benefit Research Institute (EBRI), Americans held roughly 50% (nearly 60%, including balanced funds) of their IRA assets in equities as of 2016, the most recent data I could find. Stock allocations dropped sharply when people turned 60, EBRI’s data indicates, remaining at roughly 48% to 55% for the rest of their lives.