Expand Your Education with These Courses from
Negotiating Skills: Skills for Sales Success: Part Six.
Territory Management: Skills for Sales Success: Part Eight.
A Consumer Advocate Approach to Real Estate & Mortgages: Courses 1 & 2.
Bundle 3: CIPS Institute (Non-US Version).
Bundle 3: CIPS Institute (US Version).

Many Factors Impact Retirement-Savings Risk Decisions

Have a comment on this article? Share on Facebook!

By Janet Kidd Stewart

retirement_planning_couple_advisor(MCT)—A basic tenet of retirement planning instructs investors to tilt their sails to more conservative shores as their retirement beachhead nears.

One of the oldest personal finance rules of thumb held that one should subtract his or her age from 100, and that number would represent the percentage of stocks to hold in a portfolio, with the rest held in bonds.

More recently, some experts have recommended goosing up the stock part by subtracting the age from 110.

But essentially the idea remains the same — as you age, your investments get more conservative. Target-date funds and many managed retirement portfolios all follow suit.

At a recent Morningstar investment conference, however, even that basic principle was up for grabs.

Today’s financial markets may be pointing investors toward starting retirement with a more conservative nest egg and allowing it to take on more stocks over time, says Michael Kitces, director of planning research for Pinnacle Advisory Group Inc.

To be sure, Kitces and other experts noted, there are lots of caveats to this idea. It doesn’t work for ultraconservative investors or those who want to leave behind a big inheritance, for example.

For the great majority of situations, noted David Blanchett, Morningstar’s head of retirement research, the traditional approach of growing more conservative over time works.

Kitces’ point is that many retiring Americans happen to be precisely in the type of situation calling for a different idea.

“A rising-equity glide path doesn’t work great except in one scenario: you’ve got a moderately aggressive portfolio at retirement in a low-return environment where you’re going to be spending at a fairly high withdrawal rate, and you’re just concerned about getting to the end without running out of money and not leaving a large bequest,” Kitces says.

With stock valuations relatively high now, this suggests starting retirement with a low allocation to stocks — as low as 30 percent — and taking withdrawals from the fixed-income part of the portfolio so that, in effect, you’ll take on a higher equity allocation over time, he says.

It also suggests sticking with a fairly low initial withdrawal rate in retirement of around 4 percent, Kitces says, but not becoming completely locked into that number plus inflation for the long haul. Like markets, he says, withdrawal rates need to be dynamic to avoid undesirable ends of underspending or overspending.

“On average, a decreasing (amount of stocks in a portfolio) is better, but there’s no one best solution,” Blanchett says.

In fact, for workers with more time to go before retiring, Blanchett also suggested tamping down on stocks if other areas of your life — namely your career or your real estate holdings — look risky.

His research is still imprecise, but it generally tries to customize a risk-tolerance measurement. Work in an industry prone to layoffs? Live in a volatile housing market like Las Vegas? Ratchet down on the stock part of your investments, the theory goes, though Blanchett acknowledges these are general guidelines.

Particularly for younger savers with a long career ahead of them, however, factoring some measure reflecting the volatility associated with their careers into their stock-bond allocation can help smooth the savings ride, he says.

©2014 Chicago Tribune
Distributed by MCT Information Services

Have a comment on this article? Share on Facebook!

Join RISMedia on Twitter and Facebook to connect with us and share your thoughts on this and other topics.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Copyright© 2016 RISMedia, The Leader in Real Estate Information Systems and Real Estate News. All Rights Reserved. This material may not be republished without permission from RISMedia.

Content on this website is copyrighted and may not be redistributed without express written permission from RISMedia. Access to RISMedia archives and thousands of articles like this, as well as consumer real estate videos, are available through RISMedia's REsource Licensed Content Solutions. Offering the industry’s most comprehensive and affordable content packages. Click here to learn more! http://resource.rismedia.com

Our Latest News >>