Q: I'm retired and pulled out of all my retirement savings out of the stock market in a panic last year. My nest egg is now sitting in a money-market fund where it's doing nothing. I'm worried about my retirement security, but also terrified of putting the money back into stocks in this late stage of the market. Any advice?
A: Given the way the market's been flailing this year — nosediving one day, surging the next — it's only natural that you'd be fearful of putting your retirement savings back into stocks. And for what it's worth, you're hardly alone. When Mass Mutual surveyed more than 800 retirees earlier this year, three-quarters of those polled said they were very or somewhat concerned about a major downturn in the market.
Time for lower expectations
On the other hand, more than 90% also said that they want their investments to continue to grow in retirement, which suggests they realize they need to invest at least a portion of their savings in stocks.
Q: So how do you reconcile this concern about security with the desire to earn solid returns that can help your nest egg maintain its purchasing power over the long term?
A: Well, the first thing you need to do is start thinking outside the "in or out of the market" box. I know it's tempting to try to time the market, or attempt to jump into stocks when they seem to be on their way to big gains and bail out of them when it looks like they're ready to crash.
But it's virtually impossible to consistently get that timing right. In recent weeks, for example, investors have become increasingly worried that this bull market might give way to a devastating bear. The fact that this bull market is now in its ninth year has only heightened those concerns.
But this sense of unease and foreboding is hardly new. Many times in recent years pundits have warned of stocks' imminent demise, yet the market has continued to climb. We know, of course, that at some point stocks will go into a major slump, as they have many times in the past. But we can't predict when that will happen. Which is why pulling out of stocks to avoid such a downturn is basing your investing strategy on little more than guesswork.
A more sensible approach to dealing with the market's ups and downs is to settle on a mix of stocks and bonds that you can live with in good times and bad, and aside from occasional rebalancing, stick with it no matter what the market is doing or what the prognosticators are predicting.
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There's no single mix that's right for everyone. But retirees are typically interested in protecting their nest egg from severe setbacks, which means scaling back on stocks and keeping more of their savings in bonds (plus a cash reserve equal to, say, one to two years' worth of expenses beyond what Social Security and any pensions will cover). That said, you don't want to eliminate stocks entirely, as you still need some growth potential to provide a bit of a hedge against inflation and to help you avoid depleting your nest egg too soon.
I can't tell you what percentage of stocks and bonds is right for you. That figure can vary depending on a number of factors, including your tolerance for risk, the size of your nest egg, what resources beyond your savings you can rely on to fund your retirement expenses (pensions, home equity, other investments, etc.) and how long you might live (which you can gauge with the Actuaries Longevity Illustrator). But I can suggest two ways you can get a sense of what stocks-bonds mix might be right for you.
One is to go to a tool like Vanguard's asset allocation-risk tolerance questionnaire. The tool suggests an appropriate mix of stocks and bonds, and you can see how your recommended mix as well as many others both more conservative and more aggressive have performed in a variety of market conditions in the past.
The other way you might divvy up your savings between stocks and bonds is to use a target-date retirement fund as a guide. The premise behind such funds is that you should gradually reduce your stock holdings as you near, enter and move through retirement. So by checking out the target-date fund designed for someone your age offered by companies such as Fidelity, T. Rowe Price and Vanguard, you can at least get a sense of what percentage of stocks, bonds and cash might be right for you. (Or if you're not comfortable creating a portfolio on your own, you could simply invest your savings in a target-date fund and let the fund manager do it for you.)
The point, though, is that while many times we may feel that we know which way the market is headed in the short term, we really don't. So my advice is to invest your retirement savings in a mix of stocks and bonds you'll be comfortable sticking with in good markets and bad. Otherwise, you'll relegate yourself to engaging in a frustrating and never-ending guessing game you're not likely to win.
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