My husband is 59 and I am 58. We own our home outright and have no debt. Since we are getting close to retirement, we are concerned about another dive in the stock market. We have discussed with an advisor how much we will need in retirement to last (with social security) 30 years. That figure is $850,000. If we put all our money into 5-year IRA CDs yielding 2.25%, for the next 8 years, we will make the goal with over $100,000 to spare. My question is why is this a bad idea? We live simply, don’t travel, etc. Our advisor says this is a bad idea and wants us in half and half bonds and stocks. What do you think? We would really sleep better knowing our money is safe.
Thanks so much for any advice you can give me on this.
Terry Says: Well, that’s the dilemma of all pre-retirees. And it’s a false assumption that putting all your money into “safe” investments will cover the cost of your retirement. Think about it this way: Inflation has averaged 3 percent for the past nearly 100 years. (Of course, there have been times of much higher inflation — think back to the late 1970s — and times, like now, of lower inflation.) But even at “average” inflation of only 3 percent, the buying power of your money will be cut in half in only 25 years! And surely at your current age, your life expectancy is more like 30 years!
Over the long run, stocks have beaten inflation in every 20 year period (with dividends reinvested). So having some portion of your money in stocks helps offset that risk of loss of buying power. The real question is the “balance” of those investments. I’m not sure that “half” of your money in “bonds” is the right balance — but you might want to get a second opinion, based on a realistic look at your assets, your goals, and your risk tolerance. I highly recommend a free program that T. Rowe Price offers, where you go through a “monte carlo” analysis, not on the website but working with a certified financial planner. Do it, and then compare the advice you receive from them with advice from your planner. At the very least, you’ll have a better understanding of the risks that come with “safety” as opposed to the risks that come with investing!
(And if you’re very nervous, you can sell some of your stocks –assuming no tax consequences inside a retirement account — and keep more money liquid until you finish this process.)