Retiring conservative

The old rules were simple: the older you were, the more conservative you should be with your money. That’s changed.

“Years ago, if you were 50 years of age, you would have 50 percent of your assets in stock, and 50 percent in bonds. When you’re 60, 60 percent would be in bonds, and so on,” says Marvin Rotenberg, national director of retirement services for The Private Bank at BankBoston. “The theory was that as you got older, you didn’t have as much time to make up losses in stocks.”

But now studies show that if you become too conservative, you’ll run out of money. This is compounded by the fact that people are living longer and retiring earlier, meaning you’ll need more money.

Consider the following: Three 65-year-old retirees each invest $500,000 in an IRA in 1975, and withdraw $60,000 annually to cover living expenses. One puts 20 percent in stock with the rest in conservative bonds, one puts 30 percent in stocks, and the other puts 50 percent in stocks. The most conservative investor would have run out of money in 1996 at age 86. The second investor would have done better, but have only $260,686 remaining in 1998. The aggressive investor would have done the best, having $752,653 in 1998, and $661,431 remaining in 2000.

This doesn’t necessarily mean you should switch all your assets to high-risk stocks; just make sure you won’t run out of money if you live longer than you expect.

“It’s whatever they are comfortable with,” says Rotenberg. “Take a realistic view for the long term. If you can tolerate risk, then they should.”

With the rise of the stock market to record levels, many people have so much money built up in retirement plans that they realistically won’t spend it all in their lifetime. With your own retirement well in hand, a move to a more aggressive strategy can help build your assets to benefit your heirs, especially if they are the beneficiaries of your IRA.

The funds will continue to grow tax deferred until they reach retirement age. Even a few percentage points difference in return can result in huge gains when spread over time, so consider taking on a little more risk than your grandparents did.

Todd Shryock ([email protected]) is SBN’s special reports editor.