MONEY

The home stretch to retirement

Seeing your portfolio shrink can be tough so close to retirement, but you should still be investing for the long term.

Question: I’m 58 years old. At the beginning of June, my 401(k) was worth $482,000 and now it’s worth $430,000. How can I stop the bleeding? —John, Tyler, Texas

Answer: If your goal is simply to staunch the bleeding, the answer is simple. Just move all your money into your 401(k)’s money-market option. That will pretty much assure that your account balance will fall no further.

But I don’t think that should be your goal.

Why? Well, if you keep your money in your plan’s money-market option (or any guaranteed-return investment, for that matter), you’ll be relegating your retirement stash to a mediocre long-term return, which means that your nest egg isn’t likely to grow very much between now and the time you retire.

Of course, you could move it to a safe haven today with the idea of switching back to a portfolio of stocks and bonds at some point in the future. But you then have to figure out when the right time is to move it back. You don’t want to switch out of the money-market fund too soon and incur more losses. Yet if you wait too long, you can miss the big gains that come in the explosive early stages of a stock rebound.

So if stopping the bleeding isn’t the right goal, what should your objective be?

Pre-retirees like you who are in their mid-50’s to early 60’s and have 10 or so years to go before retiring ought to be pursuing an investing strategy that can generate enough growth to support them through a long retirement yet also provide enough downside protection to prevent a market setback from totally derailing their post-career plans.

Retirement home stretch investing plan

The heart of this strategy is coming up with a mix of stocks and bonds – asset allocation would be the technical term – that balances your long-term needs as a retiree against the short-term fluctuations of the market.

Although you may not think of it this way, even when you’re in the last stages of your career you are still actually investing for the long-term. It’s not as if your investing time horizon extends only to the day you retire. On average, a 65-year-old will live another 20 years or so, and the odds are good that you could live well into your ‘90s. So you still need long-term capital growth in your retirement portfolio to maintain purchasing power and assure you don’t outlive your assets.

At the same time, however, as you approach your retirement age, you can’t afford to take big hits to your portfolio’s value. You just don’t have as much time to bounce back from market setbacks as you did at the beginning or even the middle of your career. So while going for growth, you also need to protect the value of your savings.

You can argue about what constitutes the right stocks-bonds mix for a pre-retiree. Generally, though, someone your age should have roughly 60% to 65% of his retirement portfolio in stocks and the remainder in bonds. The stocks are there for long-term growth, the bonds for steady income and short-term protection. As you age, you would then gradually move more of your savings toward bonds, although even in your 80s and 90s, you likely want to keep 20% to 30% of your portfolio in stocks.

But this is a guideline. In fact, there is no “ideal” mix, one that’s guaranteed to give the best blend of protection and return. You’ll have to make a judgment call based on your own situation.

If you get really nervous every time the Dow takes a dive – or if you don’t have much in the way of resources beyond your retirement investments – you might want to stick to the lower end of this scale, or keep even less in stocks for that matter (although, remember, that will likely mean lower long-term returns and raise the odds that you could run through your savings).

Conversely, if you can tolerate swings in your portfolio’s value – or you have other resources to fall back on, such as a pension, sizeable home equity, etc. – then you could gravitate to the higher end of the scale. To see how different mixes might perform, check out the Asset Allocator tool at T. Rowe Price’s site.

Stomaching the ups and downs

It’s important that you understand that following the strategy I’ve outlined won’t protect you from any and all losses. But that’s not the point. Even at this later stage of retirement planning, it’s okay to suffer occasional setbacks. Indeed, you can’t avoid them if you want the long-term growth you also need. But the idea is to limit the size of those downdrafts so they don’t inflict irreparable harm.

You don’t say how your 401(k) is currently divvied up between stocks and bonds. But given the magnitude of the loss you’ve suffered since June (about 10%) compared to how the stock and bond markets have fared since then, I’d be surprised if you weren’t overloaded with stocks or invested in particularly volatile ones.

So I recommend that you re-assess your asset mix and bring it somewhere within the range I’ve laid out. Doing that won’t insulate you from all short-term setbacks. But it should increase the odds that your nest egg will be there to support you throughout your retirement.

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