Which way to invest once you retire?
— -- On the day you retire, have a party. Play some golf. Embark on a world tour. Just don't move all your retirement assets into bonds.
Traditional financial planning suggests that you should be almost entirely in bonds and other safe, income-producing investments by the time you retire. But that could be a big mistake. Your retirement could last 30 years or more — and if it does, you'll need stocks in your portfolio. In fact, you may be surprised to hear that some financial analysts think your retirement portfolio should probably look a lot like your pre-retirement portfolio.
Many years ago, retirees at TIAA-CREF, the teachers' retirement and annuity company, had the option of reallocating their retirement assets just once in their lifetime — from stocks to bonds.
Back then, the idea was that you would live off of the income from your bonds, preferably without touching the principal. Bonds are long-term interest-paying IOUs issued by the government, corporations and municipal organizations. Bonds even had little coupons that you could cut out and mail to the issuer, who would then send you your interest payment.
But living off your interest is more difficult these days. Here's why:
• Many people used their savings as a supplement to their retirement money, not as their main source of income. No longer. Just 16.9% of all retirees get corporate pensions now; the median annual pension payout is $7,692, according to the Congressional Research Service. (Median means half are higher, half lower.) And it's nearly impossible to live on Social Security alone; the average monthly Social Security payment is $963.
• Interest rates are low. A 10-year Treasury note yields 4.28% now. To get $5,000 a month from T-notes today, you'd need to start with $1.4 million.
• Inflation is a danger. Even modest inflation erodes the value of your income. Say you earn $5,000 a month on your retirement savings. And suppose the inflation rate is 3% a year. After 10 years, your $5,000 will have the buying power of $3,801 — a 24% decline.
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