MONEY Despite the Risks, Stay in Stocks
Even retirement investors must sometimes take a leap. ::
BY DAVID JOHN MAROTTA E
veryone worries about running out of money in retirement. Few people feel secure about government spending, Social Security, and the state of the economy. Even fewer retirees are
confi dent about the future returns of the stock market. In the midst of this turmoil, especially after this past
summer’s sharp stock drop, many investors wonder if they should put all of their investments into something safe and avoid the markets altogether. They decide to avoid the uncertainty and invest instead in cash, gold, or annuities. My advice is that erring on the side of safety is not safe
at all. In fact, fl eeing stocks could leave you with much less money to spend in retirement than you had expected. Recent history has proven that so-called safe
investments generally don’t produce decent returns. For example, bonds get downgraded, and even entire countries default. Cash is currently paying close to zero. Until its surge of recent years, gold bullion lost 69 percent of its value over a 21-year slide for a consistent annualized loss of 5.5 percent ending in 2001. The question is, Where should you be invested at
retirement age? Common wisdom has been that most people should be in 50 percent stocks and 50 percent bonds. I believe — and studies agree — that it’s better to be
more aggressive with a mix of about 75 percent stocks and 25 percent bonds. Historically, such a portfolio returns 5.6 percent after infl ation. As the years go by, you can then gradually tilt your assets toward bonds and away from stocks. The model I often use is one that has retirees entirely invested in bonds by age 96. The other common question retirees have is this: How
much of my nest egg can I spend each year without having to worry about running out of money before I die? Multiple studies have looked at this question, and most
suggest that the answer is between 4 and 5 percent. With the plan outlined above — a 75/25 stock/bond allocation at
DAVID JOHN MAROTTA
David John Marotta is president of Marotta Wealth Management, Inc. of Charlottesville, Va. His articles on financial planning have appeared in The Washington Post, Los Angeles Times, The Miami Herald, Money magazine, and other media outlets. See his blogs at
www.marottaonmoney.com
70 NEWSMAX MAXLIFE | FEBRUARY 2012
retirement — I recommend a withdrawal rate of 4.36 percent per year. If you had an all-bond
portfolio, your returns would be lower, allowing you a retirement withdrawal rate that is much lower, only about 2.78 percent. This means that with a $1 million portfolio, you could spend only $27,800 a year to ensure you don’t run out of money. This rises to $43,600 a year if you invest more
My advice is that erring on the side of safety is not safe at all.
aggressively in stocks as I’ve described. The markets are inherently volatile, and it is diffi cult
to stomach dramatic drops. But what you must give up in your lifestyle to avoid market volatility is not worth it for most retirees. Keeping all of your investments in stable bonds might
look like an attractive option during uncertain markets, but having a standard of living that is dramatically lower, is not.
ILLUSTRATION/BULL’S EYE/IMAGEZOO/GETTY IMAGES
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