Preserving your portfolio
Baby boomers nearing retirement need to start shifting their investing gears
Add in the fact that many in the boomer generation will also be paying for college and taking care of an elderly parent, and the task of managing an investment portfolio in transition seems overwhelming. To assist, the giants of the mutual fund industry have recently launched advisory services such as Fidelity's Retirement Income Advantage and T. Rowe Price's online retirement program. The target of these new services: the more than $4 trillion in financial assets held by 60-somethings.
Still, boomers are "the between a rock and a hard place generation," in the words of financial planner Harold Evensky in Coral Gables, Fla. If they're too conservative with their money, there's a distinct possibility of outliving it--or at the very least, seeing inflation eat away at their future purchasing power.
On the other hand, if you are too aggressive, you run the risk of losing a chunk of your investments early. And such early losses can have a devastating impact on the longevity of a retirement plan. Say you had retired in 1963 with $1 million in the bank. Assume you invested half of that money in blue-chip stocks and the other half in high-quality bonds. And further assume you withdrew 7 percent of your nest egg each year, starting in 1963, for 30 years. At the end of this period, you'd still be left with $784,000. Now assume you did the exact same thing but retired at the beginning of 1962. You'd be left with no money at the end of 30 years.
What happened? Well, the S&P 500 fell 12 percent in 1962, reducing that initial $1 million nest egg from the beginning. By contrast, stocks soared 19 percent in 1963, giving that nest egg a nice start--growth that compounded over time. "This does suggest that luck can play a very important role in the success of your plan," says Philip Cooley, a finance professor at Trinity University in San Antonio.
"If you plan to withdraw 8 percent of your money in the first year of retirement and your portfolio happens to lose 4 percent that year, you're down 12 percent from the get-go," says Christine Fahlund, a senior financial planner with T. Rowe Price.
Further complicating matters for boomers is that they may have seen the best of times already. Many market watchers say we could be in for a prolonged period of mediocre returns, such as we saw in the 1970s, instead of the outsize gains of the 1980s and 1990s. If so, Scarborough says emphasis will then have to shift back "to protecting principal."
The trick will be to become conservative but not too much so. Even minor tweaks to a portfolio can reduce risk without necessarily giving up good returns. Mutual fund giant Vanguard recently studied the performance of various asset allocation strategies between 1960 and 2003. A typical portfolio of 60 percent stocks and 40 percent bonds generated average annual returns of 9.5 percent during that time. But in 11 of those 44 years--25 percent of the time--this strategy produced annual losses.
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