Posted on 07/24/2002 7:02:55 AM PDT by Huck
If you happen to sell stories about people who have seen their retirement savings, in the form of stocks, evaporated before their eyes, then it has definitely been a bull market for you lately. I have heard the stories; They left me with a lingering, nagging question:
What were they doing owning stocks so close to retirement?
I am not too knowledgable on the subject, and with nowhere else to turn for (free) answers, I have come here to lay out my thoughts, with the hope that someone can help me to understand. So here goes...
Huck's Understanding #1:
Your 401K is one of the most inflexible or illiquid investments you have. You can change your elections often, but that only affects what you buy next. It doesn't change what you already bought. Unless I am mistaken, the only time you can change what you actually own is when you roll it over into an IRA, and my understanding is you can only do that when you leave your job. That is highly restrictive.
Huck's Understanding #2:
The cliche goes like this: The younger you are, the more risk you can tolerate, therefore, you can weight your 401 contributions towards riskier growth funds in your early years, and change them to more conservative bond and fixed income funds later on as you age. But does this make sense?
The risk a young person can tolerate is the volatility, which is mitigated via dollar cost averaging. But this only addresses the price paid for the shares. In the end, what matters is the worth of the shares when you cash them in. Take this example:
Young person accumulates 100 shares of Risky Index Fund. At retirement, are those 100 shares any less risky then they were when he bought them? These types of funds can swing as much as 15% either way. Isn't it possible, then, that when the person needs the money, he could have considerably less than he expected? He might have to wait out a long bear market. In other words, aren't stocks as risky at retirement age even if they are purchased in youth using dollar cost averaging? Looking at statistical averages, the ROI might be good, but you have to look at the tolerance level, i.e., how widely are the data points that make up that average distributed, and what are the consequences?
Huck's Conclusion:
If these things are true, why not make the 401K entirely conservative? If you get a company match of even 3%, you are beating inflation right out of the gate. Get another 3-6% yield on a mixture of bonds and fixed income funds, and you can get a healthy 6-8% return. $2400/month @ 6% for 15 years= 1.1 million dollars, give or take. That seems like a pretty good retirement nut. Maybe that's more than most people can save--I put away about 43% of my income--but you get the idea.
If you want or need to get a better return to meet your goals, why not hold all of your risky positions outside your 401K or IRAs, so that you can cash out when you want? I am trying to retire early. By the time I am 45, I want to be moving most of my positions out of stocks, unless it's strictly gambling money. I can't imagine spending 15-20 years working hard, saving, making do with less, economizing, budgeting, choosing what you drive, where you live, what you wear, all to direct you towards a retirement goal, only to see it washed away with nothing you can do about it.
So that's it. Maybe I am way off. It wouldn't be the first time. All I know about investing is what I read. I hope some Freepers can help me out. Thanks.
Every 401(k) or similar plan I have ever seen allows transferring investments from "Fund A" to "Fund B" at any time. Thus, as one approaches retirement, one can attempt to protect one's holdings by transferring them from "Risky High Tech Equity Fund" to "Completely 'Safe' Money Market Fund" or some such.
AB
Having said that, you should also be aware that moving out of stocks completely even when you retire isn't a great idea. Someone who retires at 65 has a very good chance of living another 20-30 years, so your assets will have to continue to grow even though you may not be adding to them.
It's also worth noting that in one sense, fixed-income securities are actually very risky investments because there is a chance that they won't even exceed the rate of inflation over the long term.
I can change the mix, past and future, of my Fidelity account up to six times a quarter. It depends on which plan the company is able to set up.
I lost a little money a month ago, but have pretty much recovered it the last few days after moving the little that was still in stocks to money markets and bonds. This week, I even made a tiny amount...Tiny, but at least it has not been a loss.
At this point I will gratefully take "tiny"! What a month.
Am I wrong to consider the company match as covering that risk?
Greed.
Lord willing. I hope that my assumptions are decent as far as what I will need when I retire. It's hard to know for sure--I am only 34 now--but if I can accumulate enough of a nut to finance my projected goals, why risk any more than I have to? (In case you haven't noticed, I am trying to mitigate risk wherever possible.)
Yup. If I had known I could do it--I just looked it up and I can reallocate funds--I would have moved my whole nut out of stocks back in January. Oh well. Live and learn. As it is, my safe funds are doing 3% each and my accumulated stock is down 13%. Ouch.
If they really are close to retirement, I agree. Some of them (Enron folks, for example) had huge holdings in their own employer's stock. That completely evaporated. Some are just lazy. Since 401(k) et al. are self directed, some attention is required.
I don't think you should consider the company match at all when making investment decisions, mainly because it isn't guaranteed over time. The company could decide to reduce it, eliminate it, or even go out of business altogether.
One more item about inflation: People may think that inflation is low, but to be more accurate you have to consider the rate of inflation for things that you expect to spend your money on. I really don't care, for example, if the average annual increase in the cost of golf clubs is only 1.5% -- I don't play golf.
I'm also 34, and I simply buy a specific dollar value of shares in various mutual funds every month (both inside and outside my 401(k) account). I couldn't tell you how much I've "lost" in the last two years, since the "loss" in the short term is just as meaningless as the "gains" were five years ago.
Everyone told me I was crazy to get out of stocks. Now people are avoiding eye contact, and damned if I am going to say a word.
Wednesday is a bad day for a workplace lynching.
Well, I always said I would never really retire, anyway.
Exactly. Which is why I am entirely happy with a 6% annual return and all my retirement accounts are in treasuries and bonds. Inflation has been out of the picture so long that a 6% return is more than acceptable.
Of course, the mantra of the past 10 years has been "The stock market always outperforms every other investment over time." If you've got 40 years before retirement, this is true. The problem is - the majority of workers DO NOT have 40 years till retirement.
But even now, CNNFN and MSNBC 'experts' are recommending workers in their 40's and 50's to put 75-80% of their 401k assets into stocks! Makes me wonder what kind of kickback these experts are getting from the mutual fund companies. Let us not forget that after 1929 it took thirty years for stocks to get back just to their previous levels.
You could be right. As you can see, I am not too swift on this stuff. My thinking is that my interest in the future of the market is reflected in my elections--in what I am buying. It seems to me that if I had moved my funds from stocks, which have lost value, into bonds, which have gained value, my current net worth would be higher, and later on I could move funds back into stocks with plenty of time to realize more gains over time. Not to totally micromanage--I am not trying to day trade my retirement funds--but if I believed in January that stocks would slide further, I should have moved them. If I believe that I don't have to be the first one back in the pool after a bear market, then I could have waited for a good quarter before reallocating back into stocks. That's not overmanaging, is it?
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