December 2007

It is common for those planning for retirement to feel that they should make their investment portfolios more conservative once they leave the workforce.

After all, they have to live off their nest eggs for the rest of their lives and can’t afford to lose money in a declining stock market.

However, new studies continue to show that most retirees can and should own more stocks rather than less if they want to beat inflation and make their portfolios last throughout retirement.

Two professors from the State University of New York at Brockport have done a new study that confirms the advantage of having more stocks in retirement.

Holding stocks longer in retirement results in better chances of making income last.

To rebalance or not?
The study by John Spitzer and Sandeep Singh, published in the Journal of Financial Planning, was not even designed to prove this point.

Instead, they wanted to find out whether it helped to regularly rebalance a portfolio between stocks and bonds during the period when a retiree is making income withdrawals.

Many studies have confirmed the advantages of rebalancing when investing, because it forces you to stay exposed at the same levels to different asset classes even when one class is up and the other is down.

Spitzer and Singh compared six different portfolio allocations between stocks and bonds, five withdrawal rates ranging from 3% to 7% annually, and various methods of selling investments in order to raise cash for retirement expenses.

Some of the selling methods were designed to keep the portfolio in its original stock/bond balance, while others were not.

They then tested whether each portfolio, using the different withdrawal rates and selling methods, would last for a 30-year retirement.

Stocks did best
Surprisingly, the rebalanced portfolios did not hold up well. Instead, those portfolios that sold off fixed income investments first and held onto stocks for later had the largest remaining balances after 30 years, the professors said. Withdrawing stocks first left more shortfalls.

“The larger the proportion of stocks to bonds in the portfolio, the longer the portfolio tends to last,” they wrote.

Retirement has proven more costly than expected for some retirees, a new study by Fidelity Investments says.

The majority of workers surveyed go into retirement expecting expenses to stay the same or go down, according to its survey.

However, a significant minority of 39% reported that their expenses increased after retirement, Fidelity found. Health care costs were the main reason for the increased spending.

Only 33% of retirees found they spent less in retirement than planned, compared to 48% who expected to spend less.

More rich people
The number of well-to-do Americans increased in 2004, according to the latest Internal Revenue Service statistics.

It said a record 3 million taxpayers reported incomes of $200,000 or more, up 19% from 2003. Meanwhile, Merrill Lynch said it estimates there were 2.9 million “millionaires” in the United States in 2006.

Losing money hurts
It has long been established that Investors tend to avoid risks and loss when investing.

Now, a new study published in the Journal of Neuroscience indicates that feelings about losing money are tied to a part of the brain that responds to the threat of physical pain.

MRIs were done on test subjects playing a gambling game. When they faced a loss, the physical pain center of their brains switched on.