Tuesday, March 07, 2006

ONE of you will live longer than you think: Staying in the Stock Market

A recent posting by my internet friend, Random Roger, pointed to a recent Wall Street Journal article that postulated that long-term interest rates might be held down by the number of aging boomers shifting a portion of their portfolios towards bonds and CDs, and away from the stock market.

While this might be true, only the uninformed pension-aged couple will do anything more than a modest move away from the stock market. For only through long-term growth - perhaps using quality divided paying stocks - like ones I recently highlighted over here - can you expect that long-term growth and growth in dividend payments be reasonably expected to offset the effects of inflation over a long retirement.

And that's partly because ONE of you will probably live longer than you think. A 65 year old male has an average mortality around 80, and a 65 year old female, 83. However, according to the Society of Actuaries, there's better than 45% chance that one of you will still be alive at 90, and a nearly a one in five chance that one of you will be alive at 95.

Now if you put a lot of your funds into bonds at age 70, then what do you think the chances are that you'll have much left some 25 years later? Unless it was a small (perhaps large?) fortune to begin with. And the averages also hide some other factors - it's reported that blue collar workers suffer 40% higher mortality in the years immediately following retirement, so if you're a white collar worker, you can expect you or your "sweetheart's" chances to survive to be even higher.

So if you're approaching your retirement years, or have already moved your portfolio this way, this is something you definitely should review and reconsider.


The Confused Capitalist


Anonymous said...

Dear CC,
I've been retired for 13 years and am 73. My health is good, but my wife's health (71)is even better. I have a pension from a blue chip corporation, but I elected to take the full pension when I retired because my wife had been a smoker and both of us agreed she would probably pre-decease me. Now we're not so sure.

If I die she will have to depend on Social Security and money from our IRAs. Tehe IRAs were quite large in March of 2000, but suffered a large decline untill March of 2003. (We were buy and hold investors and had most of our money in growth Mutual Funds.) Since then the IRAs have gained back about 50% of the losss. We now are 50% in fixed income and the rest in a more diversified funds. (Some value, some growth, some foreign, etc.) Since we are required to take out minimum distributions and we don't need the money to live on, we have been reinvesting the distributiuons into a fixed annuity that my wife can convert to a stream of income when needed. In addition, three years ago I took out a 10 year term life insurance policy for $400,000, which I believe will help her if I should die during that term. If the IRAs don't take another big hit and with the build up of the annuity we calculate she should be in good shape if I pre-decease her after we're in our eighties.

Anyway, I thought I would share our solution to what may be a problem that other retirees may face.

Jay Walker said...

Dear Anon,

Thanks for sharing that with us - it sounds like you have worked out a good solution.

You might also want to consider some of the dividend paying stocks I highlighted in my "Leverage" series, starting in February, since past history has shown a good growth rate on the dividends, plus some capital appreciation, which nicely offsets the effect of inflation.

Overall, though you have found an elegant solution and thanks again for sharing that with us.