Retirement Investing - Investing for growth
Most financial planners and the press provide inaccurate information about
growth investing during retirement. In fact, you may have heard of the formula
that the percentage of growth investments in your portfolio should equal 100
minus your age. This implies you should have less growth investments in your
portfolio as you age and the research shows that this will bankrupt you faster. Investing for growth is essential in retirement.
The Trinity Study, the most widely sited study on withdrawal rates from retirement
portfolios, shows that portfolios having 50% to 75% of their
assets in equity investments (i.e. stock investments and growth mutual funds) will outperform those more
heavily dominated by fixed income investments. See
the trinity study here. Every similar study since then
has confirmed the same—portfolios with higher concentrations
of equities are safer over time and will last longer for
a given withdrawal rate.
Recently, the authors of the Trinity study also studied
investing over short periods. Even during as little as five-year
periods, a portfolio of 50% growth investments would outperform one
with more fixed income investments. While the conventional
wisdom is that "stocks are for younger investors,"
the data shows that equities are an essential component
and must be a large component of any retirement portfolio
in order to meet withdrawal rates to provide sufficient
income. Most thinking and advice on retirement investing and limiting the amount of stocks in your nest egg is incorrect.
Note: You may think that the wealthier investors should
own more stocks because they can take more risk. It's just
the opposite. Retired investors with large portfolios can
afford to keep money in the bank and get 3%. These people
will eat into their capital to maintain their lifestyle
but wealthy people have enough capital to last. People of
modest means do not have sufficient capital and the less
they earn on that capital, the greater the risk of outliving
one's assets. It's people of modest means that must have
more equity exposure. Be on guard. Well-meaning
people who sell fixed investments will tell you that retirees
should not take risks in the stock market. These people
simply are repeating what they have been told and have not
reviewed the investment research. Once you realize that you need a substantial growth component
to your portfolio, the question becomes how to get it? Do
you buy stocks, mutual funds, separately managed accounts
or real estate? The links below provide more detail on those
choices. Retirement Investing Newsletter -- subscribe free |
