What are the chances of running out of money in retirement? The following “movie” sets up a fictitious investor, age 35 with $50,000 in savings. The investor saves $1,000 per month. Future inflation is assumed to be 3.5%. A sample portfolio known as the “Basic” portfolio is built around an array of ETFs and three individual stocks. In this situation, there is a 50% chance the investor will run out of money by age 100 and a 10% chance by age 74, or seven years after retirement.
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Lowell Herr
Photograph: Louise taking a nap.
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If you have retired from work, the opportunity to save significant amounts of money is likely much lower than it was during your working years. How do you manage a shrinking portfolio and what moves, if any are appropriate now that the DJI is nearly cut in half? Not only was 2008 a lousy year for investing, we have been in a funk since early in 2000. I call it the lost decade.
We are unable to turn the clock back, much as we would desire, so how does one plan from this point going forward. Here are a few recommendations.
- Rebalance the portfolio back to the strategic asset allocation percentages. This simply means, move back to the percentages you laid out in your last portfolio plan. If the most recent bear market rattled your risk cage, then a new portfolio plan may be in order. If you never had a plan, not is an excellent time to develop one. Write it out so you think it through.
- Do not get too conservative. This is not the time to pull back from equities, particularly for those in their early retirement years. Life expectancy is increasing and this requires investors to think about taking on a little more risk.
- As with the working class, now may be a good time to apply a little bit of Tactical Asset Allocation. For example, if your equity/bond asset class ratio was 55/45, you may want to tilt it to 60/40 or even higher.
- Retirees who have a pension and adequate social security would do well to increase their equity percentage. Numerous asset plans are discussed over on Premium.
I will see if I can prepare a short movie that will provide examples of what I am talking about in the above points. What risk is necessary so one does not run out of money in retirement.
Lowell Herr
Photograph: Walking along the pier and about to enter Mykonos, Greece
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