Investing advice for seniors
Remember those dreams of early retirement? Lots of us had them when stock prices were soaring in the late '90s. And now? Well, as we complete what is likely to be the third consecutive year of stock losses, not as many of us plan to bail out of working life early. It begs the question: What should folks nearing retirement -- or already in it -- do to insulate against the kinds of losses many have suffered in the past three years?
A late-November, early-December telephone survey of 1,013 American workers between ages 50 and 70 found that one in five had postponed retirement plans because of investment losses in the past few years.
The survey was conducted for AARP, the nonprofit organization for older Americans, by the national survey firm International Communications Research.
Among those who had postponed retirement, only 31 percent now expect to retire before 65, compared to 72 percent before the market nosedive.
Over all, three-quarters of those questioned said stock losses had forced them to make a significant change in plans such as cutting their standard of living, postponing retirement or working part time.
Unrealistic?
It's possible, of course, that many of these people had unrealistic expectations based on the go-go '90s. In fact, the market's performance has not been all that bad. The Standard & amp; Poor's 500 index has returned an average of about 10 percent a year for the past decade despite its 40 percent loss since its spring 2000 peak.
Anyone who 10 years ago had counted on making more than 10 percent a year would have been unrealistic indeed.
If you want to be hard-nosed about it, you might ask what people in and near retirement were doing with so much invested in stocks and stock funds. Shouldn't retirees and near-retirees stick all their assets in safe places, such as bank savings and Treasury bonds?
Well, no. Older people with money in stocks were following the standard advice of the times -- to keep a chunk of their assets in stocks in order to get the growth and inflation protection they'd need to fund retirements that could last 30 or 40 years. That's still a good practice.
In his book "Stocks for the Long Run," Wharton finance Professor Jeremy Siegel reports that from 1926 through 2001, stocks returned an average of 10.2 percent a year compared to 5.3 percent for long-term Treasuries.
Sure, stocks are more risky in the short run. But over medium and long periods, stocks' returns beat bonds' most of the time -- more than 70 percent of the time in periods of five years, more than 80 percent over 10-year periods and more than 90 percent in 20-year periods.
Strategy
The trick, then, is to be able to wait out any stock market downturns.
Don't put money you'll need within five years in the stock market. For longer periods than that, people in or near retirement can feel pretty secure in their stock holdings.
While you might want to hire a pro to set up your asset allocation plan, it would work like this:
Money you will need during the next year would be kept safe in "cash" -- savings and checking accounts, short-term certificates of deposit or money market funds.
Money you'll need more than a year from now but less than five years from now can be kept in a series of bonds or bond funds with maturities varying from one to five years. Each year, some money will be taken from these accounts to replenish the cash account.
The rest might be kept in stocks. And every year or so, you'd take some money from those investments to replace the money that has flowed out of the bond investments.
That way, you're flexible. You can adjust the timing on the stock sales as the market moves up and down.
XJeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at jeff.brown@phillynews.com.