the halcyon days when that advice was sound. Life expectancy has increased and expenses have steadily risen each and every year.
“That old conservative strategy is outmoded,” says Roz Anderson, a managing director at Chase Manhattan Bank who specializes in private banking. “People are living longer. If you retire at 65, you might live another 25 or 30 years. During that time period, stocks likely will be top performers. We sometimes recommend that people nearing retirement increase their stock market allocation to raise projected returns and make it more likely they’ll reach their goals.”
One thing is clear: if you’re hoping to amass a nest egg of $500,000 or even $1 million, you’ll need a heavy weighting in stocks and stock funds. If you recall our asset allocation model from Part 3 of the Lifetime Investment Guide, we provided one very simple rule of thumb on how you’d divide your investment portfolio into stocks and bonds. According to many experts, the percentage of your investments anchored in bonds, like ultra-safe Treasuries,’should roughly correspond to your age. We also pointed out that more aggressive investors would be wise to up the stock portion of their portfolio 5%, maybe 10%, depending on their tolerance for risk.
So, what should you do if you’re worrying about a shortfall in retirement funds or you’re set on saving more should you live to a very ripe old age? We suggest that you join the aggressive crowd–investors who opt to place a higher than prescribed weighting of their portfolios in stocks and stock mutual funds. The reason: over the long haul, the stock market has outdone virtually all other investments, producing a 12% average annual return between 1926 and 1995, according to Ibbotson Associates, a Chicago financial research firm.
Bolton recommends portfolios of 60% stocks–40% bonds for clients in their late 50s and early 60s. “Of the 60% in stocks,” he says, “I’d hold 30% in large-company stocks or funds, 20% in foreign stocks and 10% in small domestic companies.” What about the 40% in bonds? “If you’re in a 28% tax bracket or higher, invest in tax-exempt municipal bonds.”
Picott, the DEC executive who’s building a seven-figure retirement fund, agrees, and has leaned toward a heavy weighting in stocks for the money he’s invested for retirement. “In my 401 (k) plan, I always go for broke,” he says. “You can’t make enough money anywhere else.” Thus, he directs his 401(k) money largely into aggressive growth, small-company and international funds.
The case for investing in stocks just got stronger, thanks to the tax act passed in mid-1997. “Now,” says Haywood, “stock market appreciation will be taxed no higher than 20%, as long as the stocks are held at least 18 months. Bond interest, on the other hand, is still taxed as high as 39.6%, so it makes more sense to focus on stocks.”
Nevertheless, there may come a point when some stocks-to-bonds switching is prudent. Bob and Kathy Arrington of Montclair, New Jersey, retirees in their 70s, have decided to lighten up