The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 73. What to Do with Stocks

TRADITIONAL ADVICE TO retirees has been to sell your stocks and buy bonds. Stocks are for young, aggressive investors who have time to let their money grow and who can ride out the bumps. Advisors told retirees that they needed the smoother ride provided by bonds, as well as the income, that they no longer needed growth. Basically, retirees have been told that they are in a phase of life when they can safely consume assets.

Times have changed. Bonds have become nearly as volatile as stocks. But they still hold less return potential than stocks. Retirees need that extra return because many, particularly the elderly, don't have much flexibility in generating earned income. Inflation looms large when earned income stops. And life expectancies have increased so much that retirees cannot safely begin consuming assets when they first retire.

Indeed, the biggest risk in retirement is longevity risk, or the risk that you will outlive your money. Ethan E. Kra, chief actuary for retirement at Mercer and my best source on this issue, has done considerable work on longevity risk. The statistics here belong to his research: The average sixty-five-year-old has no conception of the longevity risk he carries, Kra says. A sixty-five-year-old couple has a one in four chance that one of them will celebrate a ninety-fifth birthday. They have a one in ten chance that one will live to one hundred and beyond.

If you can leave a good chunk of your money in stocks, you should ...