The “conventional wisdom” of investing in your retirement years is to become more “conservative” as your age increases. Formulas, such as limiting your percentage of investments in equities (stocks) to a number calculated by subtracting your age from 100, have been commonly used. But as any Certified Financial Planner (CFP®) will tell you, each individual or family is unique, and these “rules of thumb” are often what you DON’T want to follow! Personally, at age 72, about 95% of my modest wealth is invested in stocks. Insane, you may say, but hear me out.
Many seniors make the mistake of assuming they will need all of their assets to support their lifestyle for the remainder of their lives. For many this may be true, but if you are a typical Continuing Care Retirement Community (CCRC) resident, there may be a significant portion of your wealth available to pass to the next generation. In this case I would argue the “conservative” investment philosophy is tantamount to robbing that future generation of significant wealth.
Incidentally, being able to maximize the wealth passed to the next generation is another benefit of living in a CCRC like Lakeview Village. With the major financial risk of long term care expenses mitigated through the LifeCare contract, future financial needs are much easier to forecast, and a CFP® is in a much better position to help you determine what portion, if any, of your wealth might be available for the next generation (or for a charitable cause for which you have a particular passion).
The logic for “conservative” investing in later years is a sound one, assuming the principal of your investments will be needed to support your lifestyle. Stock market prices are volatile, and you don’t want to sell a lot of stock shares when the market is down. But what if your lifestyle requires only the earnings (interests, dividends and price appreciation) of your investments? Research studies have shown that so long as the amount you withdraw each year from your investments is modest (at most 4% to 6%), the principal, if wisely invested, should continue to grow over the long term.
So while even a diversified group of stocks may be subject to significant, short term fluctuations in market value, if you are managing the rate of withdrawal (which may require you to sell stock shares from time to time) the short term changes in value are of little concern. You are still keeing the vast majority of your shares, so that when the market “recovers” value, those shares will recover also. To put this into perspective, the longest period of time the stock market has taken to recover its former value is about 4.5 years, and many patient investors have demonstrated the ability to endure this short term “pain” in order to get the long term gain.
Now consider the impact of the investment planning suggested above; that is, identifying an amount of wealth that might be available to the next generation, and investing that “wisely” rather than “conservatively”. If you invest only in C D’s, Money Market funds, etc., you will be fortunate to even keep up with inflation! This means you will be invading the principal each time you withdraw funds to support your lifestyle, and the danger of outliving your money becomes a real one!
But if your needs require only 4% to 6% of your investment balances to be withdrawn each year, investing in stocks has the potential (based upon history going back to 1926) of earning 5% to 7% above historic inflation (which has averaged about 3% over that same timeframe). For example, if you have an investment of $500,000 which you plan to pass to the next generation, and that passage is delayed 15 years, even at an average 5% annual rate, that $500,000 grows to over a million, double the purchasing power of that money!
Still want to keep all your money in C D’s? You might want to call your CFP® for a better plan!