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Is What You Know About Retirement Investing Wrong?

by Jeremy Holcombe

So you are saving for retirement and doing everything you think is right.. Then a report like this comes along and it makes you question a little about what you are actually doing. Is the way you have been going about retirement investing wrong? Lets take a quick look.

Here is the basic principle, or conventional wisdom… probably exactly what you are doing. If you are just entering retirement you should have a big portion of your savings—say, 40% to 60%—invested in stocks to help their nest egg grow over time. And as they age, all but the wealthiest should gradually reduce their equity exposure to protect against 2008-style market declines.

Okay great… but now a new study in this month’s issue of the Journal of Financial Planning is calling that advice into question. The report finds that those who take the opposite approach—by reducing equity exposure right after retirement and then gradually raising it over time—are likely to make their money last longer. This is an interesting claim, as well as an interesting turn of events.

So what should you do?

According to the Wall Street Journal, the research given showed those who start retirement with 20% to 30% in stocks and end up with 50% to 70% in stocks can withdraw 4% of their portfolio per year and give themselves annual raises to compensate for inflation over 30 years, even in the worst market scenarios. (The authors examined 10,000 simulations and assumed average annual returns of 6.5% for stocks and 2.4% for bonds.)

In contrast, those who keep 60% in stocks throughout retirement or who taper to a 30% equity allocation from 60% are likely to run out of money after 28 years in the 5% of worst-case scenarios, says co-author Wade Pfau, a professor of retirement income at the American College of Financial Services in Bryn Mawr, Pa.

So should you start planning and investing for your retirement a bit differently than you have been? At the very least it may be worth it to look into the study more (link to Journal website is given below) and from there you can make your own educated decisions on how you want to pursue your retirement investments.

Sources: Wall Street JournalJournal of Financial Planning

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