(Money magazine) -- I'm 66 and have my entire IRA in the stock market. Should I look into an annuity or should I continue to ride the roller coaster? -- Reece C., Key West, Fla.
If you get a kick out of watching the value of your retirement savings soar one day and plummet the next -- and you're okay with possibly depleting your nest egg early in retirement -- then by all means stick with a 100%-stock IRA.
But if you'd like more assurance that the savings it took an entire career to accumulate will be able to sustain you the rest of your life -- and you wouldn't mind less wear and tear on the old nerves -- then I'd say it's time you developed a more balanced investing strategy, which may or may not include an annuity.
In its own way, an all-stock portfolio can actually be scarier than a roller-coaster ride. When you strap yourself into a roller coaster, you know it will climb 200 to 400 feet and then plunge back to earth at speeds of up to 100 miles an hour. But you also know that you'll be back where you started in a few minutes.
When stocks nosedive, however, they sometimes take years to get back to where they were. It's now nearly three and a half years since the S&P 500 index swooned more than 50% in the aftermath of the financial crisis, yet the index still remains about 10% below its 2007 peak.
Young investors can tolerate such severe setbacks. They've got a lot more time for their investments to recover. And since they're still saving, downturns give them a chance to scoop up stocks at depressed prices that lead to bigger long-term gains.
But if you're retired or nearing retirement, you're in the opposite situation. You're only is your nest egg vulnerable to being decimated by a sharp market downturn, but its value will be reduced even more by the withdrawals you make for retirement expenses.
That double-whammy, especially early in retirement, can dramatically lower the chances of your money lasting the rest of your life.
So here's what I recommend. First, get a handle on the living expenses you'll likely face in retirement. That will give you a realistic sense of how much income you'll need from Social Security and draws from your savings.
Keep in mind, though, that if you want your money to last 30 or so years -- a reasonable length of time given today's lifespans -- you'll probably want to limit yourself to an initial draw of 4% or so of your nest egg's value, and then increase that amount each year by the inflation rate to maintain purchasing power.
If your projected living expenses are significantly higher than what you'll get from Social Security and pensions plus the amount you can safely pull from savings, you'll have to find some way to pare your spending (most likely by cutting back on discretionary items like travel and entertainment).
There's no magic combination that gives you the best chance for success, but I'd say a 50-50 blend of stock and bond funds is a good starting point. That mix can give you enough growth to preserve purchasing power while also offering some protection against stock market downturns. Feel free to try out different stocks-bonds mixes, as well as different spending levels.
Just remember that the more aggressively you spend and invest, the more you increase the chances of depleting your nest egg prematurely.
You might also consider putting a portion of your retirement savings into an annuity, specifically an immediate annuity, which will provide monthly payments to you for as long as you live (and, if you wish, to your spouse should you die first).
Those monthly payments, along with Social Security, can give you a nice floor of assured income that you can supplement with draws from the money you keep in a diversified mix of stock and bond funds.
There are variations on these strategies that are also worth looking into. But the main takeaway is that when it comes to investing, you want to divvy up your IRA between stocks and bonds in a way that allows for modest growth without subjecting it to huge swings in value. And to do that, you'll have to get off that roller coaster.
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