Because people are living longer, seniors often are advised by financial experts to keep a large portion of their holdings in the stock market, to fund what could be a very long retirement.
Unlike savings accounts, which typically pay low interest rates, the stock market offers investors an opportunity to grow their cash holdings at a rate higher than the pace of inflation. However, that opportunity brings added risk. When it comes to the stock market, there are no guarantees.
During 2017, the stock market soared, but giddy investors got a wake-up call earlier this month when the market underwent a sharp correction. Periodic setbacks are easy to shrug off when you’re 30, 40, or even 50. However, as you near retirement, it becomes more important to protect your money, since you may need to access those investments before they have time to recover.
If the market takes a major dip, you may not be able to wait years for it to bounce back before you start withdrawing money in retirement. Matt Hylland, an investment adviser based in North Liberty, Iowa, advises caution.
“The stock market is volatile and can take years or even decades to recover from losses,” he said. “Seniors invested too heavily in the stock market could be forced to withdraw their savings at a time when stock prices are depressed, and therefore take out a larger portion of their portfolio than may be sustainable.”
Deciding how much of your portfolio to invest as you approach retirement can be a difficult call. There is no single strategy that works for everyone. Things to consider include your tolerance for market downturns, your life expectancy, and your ability to live on your on your savings without income from investments.
People who haven’t accumulated enough money to retire on schedule may be tempted to take bigger stock market investment risks to make up for lost time. This can be the right decision, but only if you’re prepared for market setbacks.
Dealing with increased longevity
James Barnash, a financial advisor in Buffalo Grove, Ill., said as life expectancies have increased, relying on the stock market to provide adequate retirement income has become more common. With savings accounts offering little incentive in the way of interest rates, “it has been hard not to look at the stock market as the tool to use,” he said.
Although there’s no single investment strategy that works for everyone, he recommends that seniors begin by considering “the rule of 100.” This approach requires you to subtract your age from 100. The result is a conservative recommendation for how much of your portfolio should be invested in stocks. For example, if you’re age 65, you’d want 35% of your total retirement portfolio invested in stocks.
Brett Gottlieb, an investment adviser in Carlsbad, Calif., says this approach makes sense for prudent investors.
“The concern with going more aggressive than this is, as the market corrects or a bear market begins, you may not have enough time to ride the cycle all the way through and… losses could impact your planning goals,” he said.
Looking beyond the stock market
Savings expert Ken Tumin of DepositAccounts.com dislikes the uncertainty of the stock market, preferring savings accounts and CDs, despite the current low interest rates. In order to avoid feeling pressured to invest heavily in stocks, he suggests that seniors focus on creating large savings accounts before they retire.
If you can live on income from a combination of savings, a pension, Social Security benefits, or other sources, owning stocks becomes purely optional. If you don’t have the stomach for stock market fluctuations, you’re free to leave such risks to others.
Aside from the financial burdens, taking on too much risk can take a personal toll, warns Tumin. “Some people can’t sleep at night with a large portion of their money in a roller coaster stock market investment,” he said.
If you need extra income from stock market investments to fund your retirement, make sure you have enough cash set aside to cover unexpected near-term expenses. If you’re forced to take money from your investments for emergencies, you may spend down your portfolio too quickly. And be aware that if you tap into investments ahead of schedule, the additional income could place you in a higher tax bracket.
Some financial experts advise seniors who worry about having enough money to pay for their retirement to simply to work a few years beyond the traditional retirement age of 65, health permitting. The best solution may be to stay with your current employer and delay retirement, said Barnash.
“With retirement lasting for two or more decades, many seniors don’t have enough to keep them busy anyway, so working longer, saving more, maybe delaying Social Security for a few more years all can add to a more secure, enjoyable retirement,” he said.
A new working paper from the National Bureau of Economics Research found that delaying retirement by just three to six months can have the same effect on your retirement standard of living as saving an additional 1% of your salary for the previous 30 years.
Citing a 2016 report from the Stanford Center on Longevity, CBS News reported that in 2012 almost one-third of Americans between age 65 and 69 were working at least 10 hours per week. That marks an increase of 26% since 2000. The report also noted that 17% of Americans age 70 to 74 were working in 2012, an increase of 42% over 2000.
Barnash acknowledged that health concerns may limit the ability of some people to work beyond the traditional retirement age. For people in such circumstances, he suggests looking into part-time jobs if possible.
But the fact is, none of us knows what the future holds and if working longer will be a realistic option later in life – so it’s best to start saving now.