There is a long-held adage that as we grow older the investments we depend on should grow more conservative.
Several factors should cause us to question that adage. First and foremost among the reasons to question this belief is that we are all living longer in retirement, that is, when we are older, and if we want our investments to last, being too conservative is risky.
Let's say you are 60 and you are healthy and about ready to retire. You expect to depend on your investments of $1.1 million for $5,000 a month, after taxes, adjusted annually for inflation. This withdrawal is sustainable for 40 years or more provided the investments are allocated 60 to 65 percent to stocks.
Healthy retirees, at least up until their mid-80s, need to manage their investments to a horizon of 20 to 30 years. So, even healthy 70-year-olds have a long-term horizon. To manage for the long term and to sustain reasonable withdrawals, there has to be healthy allocation to growth, even at the risk of greater volatility.
Another factor that calls the old adage into question is interest paid on bonds in the last three years is negligible, actually near zero. That means that a 70-year-old retiree with 70 percent in bonds would have experienced a significant and uncomfortable drop in interest income.
Furthermore, the adage assumes that stocks are high-risk investments that aging investors should steadily cut back on. Stocks are riskier and more volatile than bonds over most time periods, but as long as the time horizon is 15 years or more — the remaining life expectancy of the retiree — the risk in owning stocks seems overstated.
The adage of increasing bond exposure as a retiree ages is very conservative and risk-averse. Adhering to this adage may be appropriate for investors who have accumulated over $5 million. It may also be appropriate for those retirees who haven't saved enough and can't tolerate a moderately higher risk of loss associated with stocks.
The adage, like so many other investment rules of thumb, oversimplifies complex issues. No matter how old a person is, a sound asset-allocation plan starts with one's net worth, expected needs and risk tolerance. Everybody's circumstances are different. The age-allocation adage makes little sense for most people and may just interfere with more appropriate allocations for many older investors.
• • •
Donald E. Askey, a Certified Financial Planner professional and president of Provident Advisory Group, is a registered fee-only adviser, headquartered in Newburyport. For questions, visit www.providentadvisory.com.
![davis [Duplicate]](http://d6673sr63mbv7.cloudfront.net/archive/x1121360453/g04803c00000000000016c982f4cd7dc0cb9d8482a3fac77b8483e5d4dd.jpg "davis [Duplicate]"){kind=small}
Conn. Commuter Trains Collide; 60 Go to Hospital
Coffee Run Leads to Hatchet Hitchhiker Arrest
Fmr. IRS Head Insists No Politics in Targeting
CDC: Fecal Bacteria Common in Swimming Pools
$1 Million in Jewels Stolen at Cannes Film Fest
NM Mom Chases Down Child Abductor
Raw: Crash Sends Car Into Fla. Pool
Raw: Obama Sits Down With Elementary Kids
Raw: Bear Falls From Tampa Tree
Ousted IRS Chief: Errors Not Caused by Politics
Terror Suspect Due in Court in Idaho Friday
Raw: Driver Ejected From Truck, Over Bridge
Could Tobacco Be the Next Biofuel?
Wash. State Releases Draft Rules for Legal Pot
Dying Man's Blinks Lead to Murder Conviction
Officials: Texas Tornado Likely Had 200 Mph Wind
Brothers Arrested in NOLA Parade Shooting
Raw: School Bus Crash Injures Five Children
Quick Response Saved Baby on Phila. Train Tracks
One Million Evacuated As Cyclone Hits Bangladesh
