If you listen to the media, you’re certainly aware of the non-stop attention being placed on the economy. Clearly, we’re experiencing something people have never seen before, and there are plenty of stories about how people are being affected. But, one thing I constantly hear are stories about people who are just a couple years away from retirement, or already in retirement talking about the massive losses they have experienced.
Whether it’s NPR, the local news, or online sources, there are always stories that highlight the sad tale of a 60-something who planned on retiring next year, but now can’t and fear they need to work another 10 years because their retirement portfolio has dropped 50% this year. I just don’t understand it. What sane person who is expecting to retire, or is already retired and needs that money would be invested so heavily in stocks that they experience these catastrophic losses?
Is it Ignorance?
Maybe I’m biased because my sole job is to prevent people from making these mistakes, but I have to wonder why so many people on the verge of retirement or are already retired are putting so much of their money at risk. Are they completely clueless, or simply pay no attention to their investments? Clearly they aren’t working with a planner, because even the most shady among them would clearly try to stear them into a more appropriate investment allocation, if just for meeting suitability requirements to protect themselves.
But what is someone who is going to soon rely on those funds thinking when they are invested primarily in stocks, which they should know can have ups and downs? Obviously, I don’t think anyone expected a 40-50% drop in equities in the past 14 months, but even so, were these people even prepared to see a 10% or 20% drop in the same period? I doubt it.
Is it Greed?
I don’t like to call anyone greedy, but I have to say, I’ve met with a number of people who are on the brink of retirement who got greedy in recent years. Many people just a few years ago back in 2003 and 2004 abandoned their appropriate asset allocation in favor of a higher concentration of stocks. After coming out of the decline of 2001-2002, when people saw 20-30% returns in a year, everyone wanted a piece of that action.
I met with people who were looking at retiring in 5 years back then wanting to move into a 90-100% stock portfolio. They kept hearing about their co-workers bragging about their gains, and they wanted it too. Sure, their co-worker might be 10 or 15 years younger, but so what. They feel they were missing out. Their risk tolerance and time horizon was thrown out the window in favor of capitalizing on some short-term gains, primarily as a means of recouping the losses of just a few years prior.
Was it greed that led people into equities 4 or 5 years ago even when it was against what was appropriate? In some cases, I think so. Money talks, and if your friends, family, and co-workers are making some, you don’t want to miss out and will abandon your plan to try and make some. Unfortunately, people want their cake and to eat it. They love the reward that comes from taking on a little more risk, but can’t stand the downside risk.
What a Nearly Retired Person Should be Doing
Obviously, there are many factors that go into determining an asset allocation, but it’s pretty safe to say that most people within five years of retirement (and actually needing to rely on that money for income) and those already retired should have a portfolio that consists of primarily income generating investments, with a little bit in stock. It isn’t rocket science, yet many people fail to follow standard advice. If you need to rely on that money now, or soon, your focus should be on generating a reliable stream of income, not capital appreciation, which comes with the possibility of periods of significant declines.
If we look at all the stories of people in this scenario who have lost 40% or more of their portfolio in the past year, they are clearly not invested properly. This would suggest they are basically invested in close to 100% equities as the S&P 500 is down around 38% YTD as of this writing. You don’t need to be a financial genius to question why someone so close to relying on their investments for income would be in the most risky type of portfolio possible.
Instead, a prudent retiree, or someone very close to retiring should be closer to the opposite of this spectrum. They should have a portfolio consisting of primarily bonds, treasuries, or other fixed-income assets with only a small component in equities. Let’s see how various portfolios like that would have fared this year compared to those who lost half their money.
- Vanguard Target Retirement Income (VTINX) – 70% bonds 30% stocks: -12.7% YTD return.
- Vanguard Long-Term Bond Index (VBLTX) – 100% bonds: 1.58% YTD return.
- T. Rowe Price U.S. Treasury (PRTIX) – 100% treasury: 11.93% YTD return.
Of course, this isn’t a definitive example, but I wanted to highlight a few different examples that might represent someone in this stage of their investing life. Obviously, if you hold some stocks, you’re bound to drag your overall returns down a bit in this market. But as you can see with the Vanguard Target Retirement fund, you still maintain a healthy stock position while limiting your losses significantly relative to the market as a whole. On the other hand, you can go strictly bonds (in this case, primarily corporate bonds) and the Vanguard Long-Term Bond Index would have resulted in just a modest positive return. And then you have complete safety with the T.Rowe Price Treasury fund, which has dominated with a 12% return this year.
Obviously, everyone’s portfolio and overall objectives are different, but someone so near, or already in retirement should probably have a good mix of treasuries, other bonds, and a little bit of stock. As you can see above, these people should be talking about relatively minor losses to modest gains, not 40-50% losses.
What I’d Like to See Reporters Asking
I also don’t get what the point of these stories that talk about people who made poor investment decisions so close to retirement is. Is it to pull at our heart strings so we feel bad? If that’s the case, this is no different than asking us to feel bad for the banks and companies who took on too much risk and got burned and are now asking for a bailout. How many people feel bad for those bad decisions?
So, I don’t see what highlighting someone who made a bad decision with their nest egg is going to accomplish. It always turns into these people, callers, or commenters on the story to place blame. It’s the government’s fault this person has to work a few more years now, or it’s the bank’s fault, or the President’s fault that these people have to rethink retirement. Sure, with everything going on, it’s caused a lot of hardships, but in most cases, these could have been avoided if people made smart decisions and invested how they were supposed to in the first place.
If it were me reporting on one of these stories, I’d be asking these people why they were invested so heavily in stocks while being so close to retirement. I’d ask how they came to this conclusion, or who they turned to for advice that put them in this position. Rather than sit and complain about the situation and place blame, why not find out what caused or encouraged this behavior so we can learn from it and make sure it isn’t repeated for the next generation.
Author: Jeremy Vohwinkle
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We have our money with a personal finacial planners. We lost too much money and I was told that they had us invested in moderately aggressive b/c of how we filled a form out when signing up with the firm. Why, I ask, in the world while everything was dropping did they not on their own pull us out of moderately agressive funds because of their knowledge that we are 65 - we could not afford to lose as much as we did???? I blame our loss partially on the FP's for waiting too long and doing nothing until I called them and told them to do so!
I agree with the gist of your article. What's also impressed me is the way target retirement funds have been pushed in recent years. People who were looking to retire in a year or two may have been invested in a fund specifically designed for their needs, only to find they've lost 25-30% of their assets. This does not speak of greed, but rather of failure to look under the hood or a lack of appreciation of how risky stocks are.
As you mentioned, I keep hearing these stories about people losing up to 1/2 of their net worth when they were close to retirement, and it just makes me think - wouldn't you want to be a little bit more conservative when you're going to be retiring in a year or two?
I am one of those people who lost a major part of their portfolio (70% in my case) due to being "overinvested" in stocks. I spent a lot of time looking after my portfolio. I was widely diversified by sector altho primarily in "good conservative dividend paying stocks that have raised dividends for many years". Much of this loss was in the large banks, IAG, BOA, LYG,BSC among them. Where I made a large (maybe for me fatal) error was in not believing that they could actually loose almost all their value.
In essense I held on thinking things had to get better as many others did. Financial advisors were saying they were now cheap. In some cases I was buying when the drops seemed over and short upswings occurred.This was the "conventional wisdom". It has of course in hindsight proven not to be valid.
While I could have gone to cash before I was decimated. I did not and that is my "fault".
I do feel a lot of blame for the seriousness of this current situation rests on the shoulders of a lot of very greedy manipulators who intended to enrich themselves at others expense. For example, were prepared to sell parcels of mortgages that were high risk without any warning to buyers. I also blame so called responsible and conservative (we thought) banks and institutions for not checking into the content of securities they bought and sold. It is really upsetting to see the perpetrators feeling they should get perks and bonuses and enormous benefits. This misery is decimating businesses and truly injuring individuals. Someone pocketed the "good" dollars I paid to purchase these stocks and securities initially before they fell so dramatically in value. I wonder where those dollars actually ended up.
I wholeheartedly agree. You beat me to the punch on writing this because I was also thinking of writing a post very similar to this one.
Why hasn't this question been answered? I think it has to do with the whole emotional component of the news. They try to get people to feel pity. I guess that's what sells on the news and makes them out to be compassionate, which shouldn't be their concern.
But the more important question is, why are they so badly allocated? It's mostly ignorance, but greed has to be a part of it as well. The same way that people who didn't need to buy a new home bought one when the market was roaring, they probably decided to put more in stocks to "ride the wave." Big mistake.
It's hard to tell people that are near retirement to lie in the bed they've made, but it's hard not to be cold towards people that weren't paying enough attention to the money they were going to need in retirement. There also needs to be some investigating into advisors that maybe didn't make this as clear to them as they should've.
This reminded me of a conversation I had with my father at Thanksgiving.
We were talking about the recent election and the economy when he asked how my finances were doing. I told him that things were down, but I keep my allocations pretty much in check, I have 30 years to retirement, blah blah, blah....
He then drops this bomb on me that he has "lost" 45% in the past year. I was totaly caught off guard, since I know he has 70% of his portfolio in cash and bonds. When I pressed him about it, he replied "I'm down 45% in my stock holdings, overall things are only down about 10%."
My thought is that there are probably more people like this out there than we all think.
The problem for older retirees is the same as with anyone else who wants a retirement that doesn't involve cat food for dinner: education.
Someone pointed out that older savers didn't have the tools that younger ones have now, such as financial blogs. They're instead getting investment advice from places like mainstream media, who have an interest in perpetuating panic and misery as it sells.
Also a factor is a fundamental change in the financial system. I think a lot of people getting near retirement were compelled, by advisors or whomever, to invest their $$ in stocks that paid (@the time) higher dividends that they could get in CDs or bonds. To hedge inflation, they thought they could get a better deal investing in these stocks, many of which are companies that are key players in the current carnage (BofA, Citi, Freddie, Fannie, et. al.). Dividend-paying stocks have been absolutely killed the past few months. If federal funds policies actually made sense, maybe not as many people would have taken the CD $$ that returned almost nothing and bought up these now-worthless assets.
It's a complex problem. There's so much going on it would be naive to think that any single individual has complete control over their portfolio and is entirely culpable now. So much is being sold off and every asset class has gone down so much. Hate to say it, but not only do the old rules not apply, there are no new rules to take their place!
The biggest problem with people is they invest in 4-5 funds and forget about, never re-allocate, not diversified and most have 40-50% of their 401k on the employer stocks. Scary stuff.
They don’t factor in the idea that on the day they retire, they don’t liquidate the entire account and there are still a few decades of growth left on the money that remains in the account.
True. But early drawing down of an account that is primarily stocks can severely degrade the expected lifetime of the fund. Bernstein discusses this in the retirement calculator from hell series. http://bobsfiles.home.att.net/hell/hell.html
Almost everyone I know who is retired or is nearing retirement claims to be 100% in stocks. The reasons are diverse - "it worked for my father" and "stocks have done reasonably well for 30 years" and "why incur the capital gains now?" Some have no fixed income option in their 401k. Most have no pension but will collect SS. Many of these folks are smart, smarter than I could hope to be. What gives?
They also have something else in common. None are interested in a balanced portfolio either via target retirement mutual funds or manually balanced. A few do the buy high sell low thing.
Caveat: this is mostly water cooler talk... I take it with a grain of salt, but it makes me worry. You'd almost wish they were in a deferred annuity.
My parents are in the same boat. I'm not being unsympathetic or trying to show a lack of compassion, but the accessibility of investment vehicles and ease of obtaining free advice now compared to 20 years ago isn't the problem. They come from an era of pensions and social security as their sole retirement, and it's only been the last few years that investing on their own enters the picture. That being said, just because you haven't been investing for long doesn't mean you dump everything you have into equities and hope to gain lost ground. Just as you said, people who do that have gambled and lost. That doesn't change the appropriateness of investment strategy.
So it has little to do with the hands you're dealt, or the different types of investment vehicles available. It doesn't matter who you are or how much money you have, but why would you go into the most important phase of your financial life completely blind? People will spend weeks researching a new TV or vehicle purchase, yet will go into retirement without even doing more than looking at a recent statement. You can call it a lack of compassion if you want, but I can't feel too sorry for someone who has their whole life riding on one investment account and was naive enough to think that they could pay no attention to it and expect everything to be just peachy.
@Mr. GoTo -
I'm only oversimplifying it because that's how the people in these stories are reacting to their situation. Yes, someone who is just retiring will have another 20 or more years to fund that retirement. But this isn't how these people see it. They see their account that was worth $400,000 last year as being worth $250,000 now and say oh my god, now I can't retire because my account is so much lower. They don't factor in the idea that on the day they retire, they don't liquidate the entire account and there are still a few decades of growth left on the money that remains in the account. So I was avoiding all of the details since this was more or less in response to all of the media stories who don't show the whole picture and simply exploit people who complain about their losses.
Yep, even the workers with companies who might have auto-enrolled employees in the 401(k) with the opt-out option, might not have been so fortunate to have companies who believe in periodic assessments and automatic rebalancing. There's also the facts of rising inflation and healthcare costs, with which more conservative investment returns cannot keep pace.
And yes, reporters love a sob story, their editors love a sob story, reporting awards committees love a sob story, and the general public loves a sob story. Spoken as a former daily newspaper reporter.
Jeremy: I think you are oversimplifying the issue. First, early stage retirees may have a 20-30 year life expectancy and a retirement portfolio of 100% fixed income will get killed by inflation during that time. Second, you are giving way too much credit to financial advisors, many of whom give terrible advice to retirees based on self-interest.
"if people made smart decisions and invested how they were supposed to in the first place."
A whole hunk of the people who are reaching retirement age started working when pensions and Social Security were the norm. They failed to update their investing knowledge appropriately when, for whatever reason, life led them on a path away from a pension and toward 401ks etc where they could muck around their money. If we are talking about men, throw in a divorce or two and one can easily end up late to mid-50s with not much of a nest egg. The predictable reaction is then to plow everything you can into equities for the next 15 years to try to make up some lost ground. They gambled and lost.
This is exactly what happened with my father. He has never been an extravagant spender and he trained for a "good job" (mechanical engineer) but life kept dealing him bad cards (some of which were really bad judgements regarding "life partners") and his financial planning wasn't sophisticated enough to minimize the damage.
One can say that he was ignorant, and perhaps he was, but you have to remember that the "smart decisions", as they trickle out to the general population, change every 10 years or so. Index funds and personal finance blogs are tools that, for most part, didn't exist for the folks who are entering retirement age. It's much easier for those of us who are < 40 to get solid investing advice and execute based on that advice. One could also call him greedy but he is first generation off the farm, grew up poor and hated it, and thus it is understandable that someone would gamble to not have to return to that lifestyle in retirement. What was the point of fighting and scraping to pay for an education then putting in 40 years in manufacturing at the expense of your health only to look forward to a retirement of scraping by? Not compelling.
Frankly, I think this post belies a lack of compassion on your part. It's easy to think you have everything figured out when you are young and entering/in the middle of your peak earning years and just "Balls to everyone dumber than me". That's actually a pretty sure sign that some life-lessons are in order.
That said, I hope that retirement planning works out better for everyone on this blog than it has for my parents. Thankfully, they have children who "get it" and who are already planning for the time when they'll need to support their parents.
"Is it to pull at our heart strings so we feel bad?"
Yes. Most social policies, driven by public opinion and planted by the left leaning media, are implemented by heart string pulling and guilt rather than facts and logic.
Thank you for writing this! This has been driving me crazy. This is the perfect time to educate people on what not to do and instead they are trying to get a pity party for those who didn't pay attention and handled their money poorly. I wish the mainstream media would take time at the end of these stories to say "this could have been prevented if X,Y,Z" so that people will learn and not just freak out and stay out of the stock market all together.