Comments on: Retirement Plans in a Down Stock Market

By: Jamie

Jamie — Fri, 10 Oct 2008 00:04:11 +0000

What I really love about your posts is that you explain these things so simply that I can understand what I thought I never could. Thanks man!

By: onaclov

onaclov — Wed, 08 Oct 2008 20:51:25 +0000

My 401K is killing me, I have to keep telling myself, its better in the long haul, but 38.75% down since jan 1 2008 cuts me deep….

By: Sarah

Sarah — Tue, 07 Oct 2008 19:47:32 +0000

Yes, the closer you are to retirement, the less you should be in stocks, but you can’t be completely without stocks. Maggie may be freaked because her retirement accounts have taken a dive, but let’s assume she retires at 60 and lives to at least 90. That’s still 30 years in retirement and 30 years is still a long time horizon.

People need to change their perception of saving for retirement. Most think that once they hit retirement, they should work on maintaining their money, but at least a portion (I would say 40% or so depending on asset allocation) should still be stocks to maintain growth.

So Maggie may need to work for a few more years, but if her asset allocation includes a healthy infusion of cash/cash vehicles, she should be able to live off that and leave the stocks to recover/continue to grow.

By: Jackie

Jackie — Tue, 07 Oct 2008 18:27:20 +0000

So my biggest question…I havent contributed the max to my IRA this year yet…should I? Or should I just wait for the market to get better? I am 24 years old right now. I just hate seeing all of my money go away :(

By: Phil A

Phil A — Mon, 06 Oct 2008 19:52:47 +0000

“What’s the most you ever lost in a coin toss?”

-Anton Chigur “No Country for Old Men”

By: Katie

Katie — Sun, 05 Oct 2008 05:07:42 +0000

The only issue I would mention here is that some seemingly incredibly conservative investments have proven themselves to be worth only pennies on the dollar as of late. Pension funds and various conservative investment vehicles, for instance, held Fannie and Freddie paper (debt from Fannie Mae and Freddie Mac), which were seen practically as Treasuries. These folks – many of whom did know a great deal – really got burned (as did shareholders, investors, and those who listened to these guys). Recently, the federal government shored up money market funds – which were seen as liquid CD’s – because one large fund reported it lost 3% of investors money when Lehman collapsed.

I don’t mean this as a criticism! I just wanted to point these things out. It seems to me that a lot of folks have been lulled into thinking that various investment tools are quite safe when they are more at the mercy of the credit markets than we would like to think. :-(

By: Roger

Roger — Sun, 05 Oct 2008 03:32:02 +0000

Trent, great post again. Just one comment: not all target retirement funds are created equal. Vanguard’s funds, for example, are known for being fairly conservative. While this doesn’t change the basic advice for those who simply want a set it and forget it retirement plan (find a good fund company, choose the retirement year nearest to when you want to retire, regularly add additional funds, enjoy a well-financed retirement), for others, it might be worth looking at the fund family’s other retirement funds to see what the retirement fun they’re considering will look like in 10, 20, or 30 years, and deciding whether that will be more or less conservative than they desire.

@Sarah (Comment #24): There are inflation indexed annuities, which increase the annual payout to keep pace with the rate of inflation. The initial payout is smaller than with fixed rate annuities, but the real spending power of the money you’ll receive will keep pace with real-world costs (more or less). (Thank you, Money magazine!)

@Kacper (Comment #26): Almost every commentator suggests keeping at least some funds in stocks, even after retirement (the old adage about ‘100 minus your age should be in stocks’). This allows you to take advantage of future ‘heads’ flips in the stock market, while keeping plenty of money to live on in safer assets, like bonds (where ‘heads’ might be up 6% and ‘tails’ is down 3%, to continue Trent’s metaphor) and cash equivalents like money market funds (where you’re using a two-headed coin, but each head result only gives you a 3% annual boost). This allows you to reap many of the benefits of increased stock value, while cutting down the risk.

By: Sara R

Sara R — Sat, 04 Oct 2008 15:31:38 +0000

The problem with this idea is that a coin flip is a random event. The performance of the stock market is not random. In the short term, it’s unpredictable, yes. But you can see trends over the longer term. There are a lot of reasons to think that the “coin flips” over the next 10 or so years are going to be increasingly negative: baby boomers retiring and leaving their peak stock market investing years, massive deleveraging because everyone took on too much debt, money printing leading to decreased value of the dollar, upcoming Social Security and Medicare crises, Peak Oil–need I go on? Conventional wisdom assumes that the stock market will go on the way it has over the last 25 or so years, on average, but enough of the fundamentals have changed that I think that that is an unwise assumption.

By: Asav Patel

Asav Patel — Sat, 04 Oct 2008 13:09:26 +0000

Absolutely True. When you are near your retirement you should shift your capital in Debt funds.
This is the advise for those people who are in their 50s means in their pre-retirement ages.
But for those who are young today, i would rather suggest different way to secure your Financial Future….
The wasy is start your own Business or start developing and growing your own Asset. Say for example, let’s take the Example of Trnet. Trent will not have any financial worries in future not because he is investing money and he is a personal finance writer so he knows everything about money. But because Trent has started developing his own Asset from October 2006 and that asset is “The Simple Dollar”. This blog.
This Blog is trent’s Asset and it will continue producing enough Cash flow for Trent until he lives and forever means for his future generations also.
So what i want to stress here is that, i want to tell youngsters that start your own Business or Asset development (Like Trent, Bill Gates, Warren Buffet, Mukesh Ambani, Mark Zuckerberg the founder of facebook.com) as early as possible in your Life. Because this is the only way to have no Financial Worries in future. Your own Business or Cashflow Producing Asset………..!!!!!!

By: Kacper

Kacper — Sat, 04 Oct 2008 11:14:42 +0000

Hmmm.. interesting topic, but I have mixed feelings about this approach. On one side it sounds logic to move assets from stocks when you are closer to the retirement.

But going this way, you generally shorten your period of flipping the coin. The shorter period, the less average results you get. And for best results we really want as many coin flips as it is possible. So the longer period of time in stocks the better results (on avg) we get). So it sounds counter intuitive to take assets from stocks. What do you think about that?

By: Jillian

Jillian — Sat, 04 Oct 2008 03:57:19 +0000

The coin flip is a great way of explaining that concept, thanks!

By: Sarah

Sarah — Sat, 04 Oct 2008 02:12:51 +0000

Chris, while an annuity can be a good idea, inflation will eat away at its value over the course of your retirement (which could be twenty years or more). Thus you can’t just sell your portfolio and dump it all into an annuity when you hit 65.

By: Jennifer

Jennifer — Sat, 04 Oct 2008 00:32:29 +0000

I looked around my 401’s site, and there is indeed a program similar to the Target program you mentioned… it does seem to be a good fit. I couldn’t quite convince myself to go “agressive” with the market the way it is, but the moderate option seems nice. Thank you for the suggestion! I’ll still keep an eye on it to see where it goes, but this is a much more comfortable place to be than the “oh, this one looks good” method for someone who has no clue.

By: Jim

Jim — Fri, 03 Oct 2008 23:48:06 +0000

Trent’s main point here is 100% right. The closer you are to retirement the less of your retierment assets should be in stocks. Its unfortunate to see the news stories of people with 5 years or even already retired who are losing 20% or more of their retirment funds due to stock losses. Those people have had too much of their money in volatile and risky stock market. On the other hand young people (like Matt in #2) really should have all their assets in higher risk stock portfolio. If you have 30-40 years until you retire then you should have your money in the higher risk assets which have higher average return rates. Yes if you are young now then today you might have lost 20% or so in the past year. But that is OK and should be tolerated. Don’t pull all your money out and get frightened. You’ve got years and years of investing ahead of you to see that money grow and grow.

Jim

By: Helen C

Helen C — Fri, 03 Oct 2008 21:11:27 +0000

It would be more accurate, and less offensive, to speak of “appropriate” and “inappropriate” asset allocation. And even so, one may have (apparently) the most appropriate asset allocation, do (apparently) everything right, be (apparently) perfect — and still lose. There really, truly are no guarantees. It really, truly is impossible to control what happens. Right now, to me, compassion, humility, and a sense of humor are looking more important, maybe especially than anything material.

By: mkb

mkb — Fri, 03 Oct 2008 21:04:04 +0000

Right on, jtimberman.

Since my plan doesn’t offer a target fund, I’m managing my stock:bond ratio myself. How often should I be rebalancing? Vanguard seems to recommend waiting until your percentages are at least off by 5, but I’m wondering if that’s too conservative. Thoughts?

By: Lurker Carl

Lurker Carl — Fri, 03 Oct 2008 21:03:35 +0000

I recommend buying individual bonds instead of bond funds. Bonds can and do lose value, you have no control over the quality that a fund manager purchases or the frequency of trades. Why pay a fund manager to do what you can easily do for youself?

By: Chris

Chris — Fri, 03 Oct 2008 19:08:27 +0000

Has anyone thought of an annuity? I know that’s a dirty word in some circles, but if you’re 55 and you want to make sure you don’t outlive your income (which is pretty much the whole purpose of retirement planning), why not supplement whatever social security you may have with an annuity to guarantee yourself a minimum level of lifestyle? Keep the rest diversified among stocks, bonds, alternative investments, and cash and you will be well on your way. We insure everything else in our lives, why not insure our retirement?

By: K

Fri, 03 Oct 2008 18:40:29 +0000

Sally – You will be 60 in 2040, so I would pick this one (which is what I have, same age), or one 5 years on either side. They will be only slightly different. The difference is that a 2040 fund may have 85-90% stocks while a 2010 fund (someone who is retiring now) would have a smaller percentage in stocks. You need to switch from bonds to stocks gradually as you get closer to retirement and these funds do all the switching work for you. So since it’s likely that you will work till 55-65, I would choose a 2040 fund if you like the automatic option. Some 401ks do not offer the target date funds, in which case you should put maybe 65% in an S&P index, 20% in an international index, and 15% in a fixed income fund. Then you will want to rebalance this every year or so. They say 110 minus your age is the percent you should have in stocks.

By: Michelle

Michelle — Fri, 03 Oct 2008 18:01:26 +0000

My husband and I are actually putting MORE of our retirement money into stocks right now (he’s 27, I’m 25) because right now, with stocks being cheap, we’re getting more for our money. And when they rise again (like they always do), then we will have more shares that are worth more money. But, this only works because we aren’t looking to retire for another 40 years.

If you want to gamble, go to Vegas. But don’t expect to come out ahead.