According to a recent survey by the Employee Benefit Research Institute, a whopping 40% of people between 56 and 65 had more than 70% of their 401(k)s invested in stocks at the beginning of 2008. Even more shocking: Almost 25% had 90% or more in stocks!
Wow. Given the market’s dismal performance last year, and so far this year, that means an alarming number of retirement accounts have been absolutely decimated.
This is a sobering reminder that asset allocation is probably the single most important investment decision you make. In many ways, it’s more important than the individual investments you pick. And that’s especially true if you’re using funds, which is generally the case in 401(k)s.
I recently talked about asset allocation in this Money and Markets column. And if you need more specific information on how to fix your retirement portfolio, or how to re-allocate your investments in this brutal bear, check out my retirement report, which recently went to press.
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{ 8 comments… read them below or add one }
I’m 66 and I realized the economy was going south two years ago. I tried to find a safe place for my retirement money and moved my account to a new broker at the beginning of 2008. This was supposed to be a very conservative investment company, but I was put into low rated bonds (BBB), and closed end funds with a high % of small cap investments. These might have been good in boom time, but have done poorly over the last six months.
All of the brokers I’ve ever had are willing to invest my money in anything that they can push me into buying. I like the fact that you are not a broker, but selling information and leaving the decisions up to me. I just subscribed to your Dividend Stars, and I’m looking for a good broker who won’t give me bad advice, or accept my choices if they are bad too. Do you have any recommendations on where to go? Should I just do my own on e-Trade?
I repaid Social Security (I knew about that option before getting your report). I pulled the money out of my IRA. Since SS had taken about $10K away over the last four years because I earned too much money, I didn’t have as much to repay. My accountant said I could write the withdrawal against the repayment, so I won’t have to pay taxes on it. I will now be making about 8% on the repaid amount, which is more than I could in my IRA. However, with the Federal Government so overextended I wonder if Social Security could go broke in a few years.
Nilus,
interestingly enough, I havent found any updates on investing websites on how one should be thinking about the stock/bond/cash split.
Almost all sites have very similar guidelines based on historic market performance but excluding the importance of the recent market turn.
Any thoughts?
Nilus Mattive Reply:
March 24th, 2009 at 9:38 AM
I think many writers avoid making specific statements since the issue of asset allocation is so closely tied to an individual’s goals, personal beliefs about risk, etc.
That said, how would I update the rules of thumb based on recent market events? Maybe not as much as you’d think. If anything, I would be arguing for steady deployment of cash reserves to take advantage of depressed prices in both stocks and very select categories of bonds.
In other words, the one thing I don’t agree with is the idea that NOW is the time to be raising cash (unless it is for the purpose of switching into more attractive investments). Or that this crisis indicates investors should always have MORE of their portfolios in cash. I do — always — advocate a healthy amount of cash reserves, however.
And for anyone who came into this situation with an above-average amount of cash in their portfolio, I’d be recommending select buying of both stocks and a few bond categories.
The split between bonds and stocks is a little bit harder to address universally. I still see a lot more interest rate risk in bonds than stocks, and thus less downside in equities.
Some bonds are beginning to look interesting to me. I will have more on that in the next issue of Dividend Superstars (going to press this Friday) along with some commentary on whether preferred shares are a good buy right now.
I am almost 70. I lost about half of the little amount of accumulated money in my taxable brokerage account as the Markets crashed in 2008. I get by on Social Security and some other money from the Federal Government (it is amazing how many programs there are beyond the ones that most of us can name, like SS, Civil Service, VA!) but had intended to use dividends from the Market to supplement the fixed income when it became necessary. I would believe that there are millions of other older Americans doing this also, and now in the same bind. The question which gets no answers, at least so far, is how likely is it that the Congress will either reduce these pension and other programs that so many of us rely upon or allow them to continue at the current dollar amounts as inflation escalates at extreme rates? AARP says most of us senior citizens are just barely getting by now. Jack up prices of food, medicine, housing by 30% or 40% or more via inflation and a lot of us are going to die of lack of one or maybe two of those basics if nothing else changes. Add in all the increasing numbers of younger people without jobs who are suffering, think about the fact that apparently the gun shops nationwide cannot keep guns or ammunition in stock, maybe a lot more than seniors will find the need to get serious about making the dudes inside the beltway and on Wall Street go get their heads screwed on straight? I know that all I want is the things I worked my fingers to the bone and paid in advance to obtain over 50 or more years: Enough food to not go hungry, a safe place to sleep and leave a few possessions, medicine to avoid pain, and have a little time to sit on the porch and watch the sunset.
Sorry to hear about your bad experience.
I do know people who are very happy with their financial planners/brokers, but if you’re planning on calling the shots yourself from here on out, yes, I would recommend a regular discount brokerage account.
If you still feel better having a “sounding board” for your choices, the best way to go about finding a new broker is getting personal recommendations from friends in your area and then following up with interviews in person. Remember, you’re the customer! Don’t be afraid to ask tough questions and tell them exactly what you want them for — placing trades and second opinions only. Heck, they may be happy to add a client who doesn’t require a lot of hand holding.
And wow, congrats on taking advantage of that S.S. provision. You are truly in the minority!
While the Federal government is clearly digging itself into a massive hole, I think *near-term* Social Security recipients have little to fear.
And if that turns out to be incorrect, imagine where all the other investment choices will be by then!
Bottom line: You’re right to take the “guaranteed” 8% at this point.
Sorry to hear about your losses, Dusty. You’re right … there is little wiggle room in most seniors’ budgets, and despite overall deflation … prices for the biggest items like healthcare continue rising.
There is no easy answer. I wish there were.
Will Congress reduce government programs? I don’t think they can afford to. However, if inflation really takes hold again, the money pumping will effectively reduce the value of those programs anyway.
I know what you mean about the plethora of programs, too. My grandfather was a coal miner and I remember him receiving those Black Lung checks in the mail!
Nilus,
I read your comments today 5/19/09 on social security. Please go to the federal budget for 2008, look at the social security section, and see for yourself that SS going broke has less to do with seniors collecting benefits, and more to do with people UNDER retirement benefit age collecting money each month. Examples of programs include; payments to unwed mothers, WIC program, disability benefits to anyone at any age for most any injury, funding for drug treatment centers, tuition dollars for re-training workers, the list goes on and on. Don’t misunderstand, these are great programs, but they don’t belong under SS. Additionally, I watched my father pay exorbitant federal and state taxes growing up, especially into SS FICA and federal government. He paid plenty into the system. Also, I am a high income earner, and I routinely max out my payments to FICA by april or may of each year. Please get the facts straight, the old mantra of old people bankrupting SS is a joke. This lie was sold to your generation by a government that was unwilling to stop funding state level programs and address the social issues facing a mature country. But go ahead don’t believe me, check out SS federal budget expenditures for 2008 to persons UNDER 62 years of age and then get back to me. Lets return SS to the system it was originally intended for, RETIREMENT AGE benefits ONLY. And return the political and social funding programs to the states where they belong. Thats my rant.
Nilus Mattive Reply:
May 19th, 2009 at 2:18 PM
Hi, Larry. I didn’t paint senior recipients as the problem. Instead, I simply said that the entire structure of pay-as-you-go is unsustainable without continual tax hikes and/or benefit reductions. The latest numbers prove that. It’s the nature of the beast.
My point regarding seniors was that THEIR benefits look less in jeopardy than those owed to people farther away from retirement age. In other words, I don’t believe they should buy into the hype that their benefits are threatened … instead, they should continue to make sound decisions based on their individual situations.
As you noted, there are many groups of people collecting money from S.S. that do not fall under the traditional category of “retiree.” I made that very same point, to a lesser degree, in my column today. Basically, the program has been continually expanded over its lifetime while its current revenue base is shrinking.
I don’t think we’re really disagreeing here at all …
Nilus