Retirement Myths

One of the most quoted retirement myths is that you should have less money in stocks as you get older.

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I was playing golf recently with a gentleman in his early 70s. He told me that his investments have returned 16% over the past two years and wondered if I thought that was good. His allocation was 30% stocks, 50% fixed and 20% cash. He concluded by saying this is the standard allocation for someone his age.

One of the most quoted retirement myths is that you should have less money in stocks as you get older. This myth is often followed by the formula of taking your age minus 100 to get the correct allocation of stocks. My friend obviously used this formula to arrive at a stock allocation of 30%.

This myth began fifty years ago when most people were only expected to live 5–10 years in retirement. Today, there is a 25% chance that a couple retiring at age 65 will have one of the spouses live to age 95. You cannot fight 30 years of inflation with a portfolio over-weighted in fixed income. The problem is that people are confusing risk with volatility. They look at the volatility of the stock market and see risk and ignore the risk of inflation which will nearly triple the cost of goods and services over 30 years.

I explained this to my golfing friend and suggested that he should have a minimum of 50% in stocks. He scoffed and probably thought I had been out of touch the last three years. Lest you think this is an isolated occurrence, my sister called two days later to ask if I would review her 401(k) allocation. The advisor to her company plan told her she may want to be less aggressive now that she turned 50. Myths are hard to kill even among advisors. I told her to keep the allocation unchanged.

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