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Retirement Investing: Needs vs. Wants

Posted by Michael J. O'Connor | CWS®, Vice President Investments
September 13, 2017

needs-vs-wants-investing.pngThe conventional wisdom is that once a person retires, they should pare back exposure to stocks and focus instead on a more balanced, conservative approach. Perhaps the most-used description for this type of retirement strategy is “capital preservation.”

But what if, somewhat contrary to intuition, capital preservation actually meant that investors needed to maintain a significant allocation to stocks? This is where retirees may have the tendency to mix-up their investment needs vs. wants. Retirees tend to want steady, conservative returns, which makes the argument for allocating more to bonds and cash. But what retirees may actually need is long-term growth to account for cash flow needs and rising expenses over time, which makes the case for allocating more to growth assets, like stocks.

Take health care, for example. Research by J.P. Morgan has shown that the current estimated median health care costs for a 65-year old are about $5,140. But when that person turns 85, that cost is expected to have risen to $18,110. This research suggests that it may be prudent to assume an annual health care inflation rate of 6.5%, which according to J.P. Morgan may require growth as well as income from your portfolio in retirement.

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Another somewhat underappreciated factor supporting the need for long-term growth is life expectancy. Due to advancements in the field of medicine, Americans are living longer lives, which also means more years of living expenses and cash flows we need to account for. According to the Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 84.3. For a woman that number is 86.6. The central question for retirees then becomes: is your portfolio positioned to last for 20+ years while providing for all of your living expenses?

Finding a Balance That Works for You

By no means are we saying that retirees need to run out and increase their allocations to stocks. That would be too risky for most. But working with a financial advisor to find the right balance is key.

As you can see from the chart below, investors can obtain growth even without going all-in on stocks. Using the peak of the market in October 2007 as a starting point, as you can see below an investment portfolio of 40/60 stocks and bonds, 60/40 stocks and bonds, and 100% stocks (S&P 500) have delivered comparable returns over the last ten or so years.

 

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Over the long-term, however, it is generally stocks that should provide the upside growth that retirees need to keep up with living expenses, inflation, and other costs.

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Not Sure What Your Ratio of Stocks to Bonds Should Be? Ask a Wealth Manager

How much you allocate to stocks vs. bonds vs. cash vs. other types of investments depends on a variety of factors: your current portfolio size, your cash flow needs, life expectancy, risk tolerance, and so on down the line. At WrapManager, we have detailed discussions with our clients as they get started, and throughout their time with us, to make sure that their portfolio allocations match their needs. If you want us to take a look at your current allocation, or want us to make recommendations to you from scratch, you can get started right away by requesting a personalized investment plan here.

 

Retirement Planning

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