Retiring? Don't bail on stocks

July 20, 2007

Retiring? Don't bail on stocks

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The Seattle Times

Once they retire — and often several years before — investors typically shift out of stocks and into bonds in an effort to boost income and reduce risk. But investors are being too conservative, says Jim Rothenberg, chairman of Capital Research & Management, which manages $1.1 trillion through the American Funds.

"We've found that for a couple that retires at 65, there's an 86 percent chance at least one spouse is going to live to 85," Rothenberg said at a recent industry conference. "That's an awfully long time frame."

The average American has a life expectancy of 77.9 years. Women live longer than men. Health and lifestyle habits also play a role (Predict your life expectancy using Northwestern Mutual's "longevity game" calculator at www.nmfn.com). Your portfolio needs to grow in value to provide income each year and keep pace with inflation. After all, from 1977 to today, home prices jumped from a median of $42,900 to $212,300, while the price of a loaf of bread more than doubled.

"There are a fairly high percentage of investors who are investing very conservatively," says Peng Chen, president of Ibbotson Associates. "They say they're concerned about swings in the market. But over time, even in down markets, a more aggressive portfolio allocation will outperform a conservative one." Chen thinks most of today's retirees should keep 40 to 60 percent in stocks. "Your risk preference comes into play, yes, but from a pure investment perspective, you will still need high-growth assets well into retirement," he says.

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