Stocks for Your Long Run
By Gary Silverman, CFP®
Last week I took you through my journey of studying the use of stocks in an investment portfolio. This week, I want to look at why an investor, particularly a person investing for or during retirement, does not want to ignore the stock market.
A major part of my career is to help people plan to achieve and maintain a financially comfortable retirement. They pay me the same whether I put all their money into stocks or all of it into bonds, so I have no incentivized bias toward one or the other. The preliminaries out of the way, let’s get started.
The main reason stocks should have a place in your retirement portfolio is that you might not drop dead as soon as you like. My preference is to plan a retirement assuming the client is going to live until age 100. Most of my clients think this is ludicrous, but my reasoning is sound and based on actuarial studies. Actuaries are really boring people who like statistics. They work within the bowels of insurance companies, churning out data such as the odds you might have a heart attack while eating a grapefruit and drinking your coffee tomorrow morning. Their research is critical to an insurance company’s ability to make money.
Those actuaries tell me that if I have a couple entering retirement, there is a 50% chance one of them is still breathing at age 92 and a 25% chance they are still alive at age 97. If you think there is no way you can live this long, that’s fine. We’ll just assume it is your spouse who does. That way you are free to drop dead whenever you want.
Now, if there is a 25% chance that someone is breathing at age 97, then I’m guessing they are still eating, wearing clothes, living indoors, and lighting and cooling the inside with electricity. In other words, they are still spending money. So, by golly, I better plan on having money for them to spend.
Another problem with living to a ripe old age: Things will cost more when you are 70 than when you are 50, and they will cost more when you are 90 than when you are 70. While you may not see your cost of living go up every year, I think we can agree that keeping you comfortable costs more over time.
Then there’s one other itty-bitty problem. If you have investments and make money, Uncle Sam is going to want his cut.
In summary: 1) You (or your spouse) may live a long time; 2) you’ll need more money every year to live comfortably; and 3) not only will you need to earn more each year, but you must also be able to cover the taxes on what you earn so you have enough left over to afford your cost of living.
What does this have to do with stocks? Come back next week and find out.