When you think about safety in retirement and preserving your nest egg you have created throughout your working life, what comes to mind? Bonds, Cash, or Money Markets Funds? For many people - this is where they feel safest. This used to be the way to approach retirement, but with elongated life expectancies, you should think about safety as maintaining or even increasing your purchasing power (not just maintaining your principal in fixed income investments).
What is purchasing power? It is the value of a currency expressed in terms of the amount of goods and services that one unit of money can buy. If you think about it that way, currency is not money, it is just currency and it loses some of its value every day due to inflation. That means even if you preserve your principal (your nest egg) and the cost-of-living doubles over your retirement due to inflation, you would have lost half your money.
That can be a scary thing to think about. For example, most people think they have this huge pot of money and will be safe by putting it in bonds or some other type of fixed income investment. However, they do not realize that putting that money into something “safe” could be detrimental to their success in retirement. So, if bonds are not “safe” in retirement what has been? We believe the short answer is…equities.
Equities, or the ownership of great companies in America and the world, have generally been twice as good as generating a real return, or a return over inflation.
- Since 1926 large company equities have compounded at about ten percent, while similar quality bonds have compounded at about six percent1.
- Since inflation has been around 3 percent, the real return of large company equities has been about double that of similar quality bonds1.
Therefore, investing in equities may allow you to preserve or even increase your purchasing power throughout retirement. That seems safer to me than having your monies value (purchasing power) decrease every day. Now, I am not saying that you should go out and put all your money into stocks (which you shouldn’t). I am saying that the old way of thinking about safety in retirement needs to be viewed with a new set of eyes – ones’ that understand our definition. To be honest, a way to truly feel safe in retirement is to have a comprehensive financial plan.
Having this plan will not only allow you to see the full financial landscape as you enter retirement, but it can also allow you to use your portfolio as a tool to reach your financial goals. Which in turn should be the deciding factor on how you are invested…not just saying you need a less “risky” portfolio because you are in retirement. Focusing on your plan annually is the real safety in retirement.
- Murray, Nick, Around the Year with Nick Murray, 2016
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions.