By Yann Kostic from the October 2016 Edition
Financial advisers often recommend that their clients maintain some of their savings in stocks, even after retirement. But is the risk worth it?
Retirees living comfortably on income from Social Security, pensions, and bonds may think it’s crazy to take on the anxiety that comes with fluctuating stock prices for a little more growth. That’s understandable: after the recent financial crisis, it’s easy to believe the market may nosedive and destroy the value of your nest egg.
If you’re certain you can live comfortably the rest of your life on your Social Security, pensions, and bonds without dipping too deeply into your retirement savings, you have a good case for avoiding stocks.
“If, for example, you have $500,000 in savings, and plan to withdraw 3% ($15,000) in the first year of retirement, increasing subsequent annual draws for inflation, there’s a 90% probability that your nest egg will last at least thirty years, even if invested in 50% cash and 50% bonds”, says global asset management firm T. Rowe Price.
But what about unforeseen circumstances? Your daily living ex-penses could go up by more than anticipated. You could de-cide to travel or indulge in expensive hobbies. Or you could experience a costly medical crisis or a lawsuit.
Say, with $500,000 in savings, invested in 50% cash and 50% bonds, you now want to withdraw 4% ($20,000) in the first year of retirement, and withdrawals will increase annually to com-pensate for inflation.
As T. Rowe Price’s research indicates, this change from 3% to 4% means there’s less than a 50% probability that your nest egg will last for more than thirty years.
If this possibility concerns you, you may want a cushion to ab-sorb unexpected expenses, and the growth potential of stocks may appeal. However, they may not be right for you. Your ad-viser, who understands your individual circumstances, can help you decide.
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