Those reaching retirement age often find themselves with a difficult choice to make. At the peak of their careers, they often earn more than they ever have in their entire lives, making retiring in the first place difficult. At the same time, their retirement balance may have enough projected earnings from stocks to sustain a long and happy retirement, but a bear market could put an end to this projection almost instantly. With longer retirements, a decline in their investments is almost inevitable, leaving many retirees unsure what their best move is.
Because stocks have an inherent risk greater than government bonds, many retirees don’t feel secure holding them. At the same time, it’s push to forgo a potential gain for a small amount of risk.
This begs the question “How much should a retiree like me keep in stock?” This question, while simple in nature has a much more complicated answer depending on your circumstances.
Americans are living longer than ever; a 65-year-old may have 20 or even 30 years ahead of them, maybe they will need some considerable gains from their investment portfolio in order to beat out inflation and not bleed their retirement accounts dry.
To make matters worse, long-term bonds or paying out a very low rate of interest. If we ever saw inflation like we saw in the seventies and eighties again, anyone holding their retirement accounts in long-term bonds would see their account balance nearly wiped out.
For a more specific answer, we look to the private investment group known as the Oxford Club. The Oxford Club recommends that any retiree keeps a minimum of five years worth of liquid funds in stable bonds. The reason for this is that the average declining market in the United States loses 32% of its value and takes about three years to recover. By keeping five years available, you are able to cover yourself in the most extreme bear markets, even ones that last 5 years as opposed to three.
Every circumstance is different, and for investors like the Oxford Club they encourage large retirement balances to cover any potential risk. Once you have sufficient assets to cover any sort of risk you can afford to either go long on stocks or hold back a considerable amount of cash for stability’s sake.