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Approaching Retirement? Be Careful with Equities (and this has little to do with COVID-19!)

A recent PLANSPONSOR article cited a February study which indicated that the average individual nearing retirement held 78% of his/her portfolios in stocks. While that percentage may have declined, given what has happened since February, COVID-19 should be irrelevant to the argument as to why those about to retire should not be loading up on equities. Let’s lake a look at a historical example to find out why:

It is October 11, 2007. I am 65 years old - and tomorrow, I will be retiring! I have done a fantastic job of saving for retirement and I have $2 million dollars in my retirement account. However, while I have done a good job saving, my diversification isn’t so great. Of my retirement assets, not a dime is invested outside of equity mutual funds. Thus, aside from a Social Security benefit that pays a fixed amount in retirement, I am not diversified at all. But hey, I have $2 million! And it’s not like I am invested in aggressive stocks - all of my assets are in low-cost index funds designed to track the Dow Jones Industrial Average. And that average is doing very well; in fact, as of today (remember, it’s October 11, 2007) the index is at an all-time high. $2 million plus Social Security in retirement - I’m on cloud nine! What could possibly go wrong?

Well, even if you don’t know the history, you can probably guess what happened next. There was a little thing called the Great Recession, where, from October 11th, 2007 to March 6th, 2009, the Dow Jones Industrial Average lost 54.1% of its value. Back to our example.

Now, I am almost 67 years old - and in two years, I have gone from being comfortably able to retire to contemplating going back to work to avoid running out of money! My undiversified portfolio lost 55% of its value (adding in the expenses of my index fund), and dropped from $2 million to just $900,000, from investments alone. I also had to withdraw $100,000 for retirement expenses, so I am down to $800,000. I’ve had enough of this stock market thing, so I am going to take the remaining $800,000 and purchase this wonderful annuity that my sister-in-law’s firm sells so that I will never have to worry about the stock market again!

Of course, the stock market made quite the comeback after 2009, but, in the example, I never benefited from that. And, while this may be an extreme example, it makes the point that being over-weighted in equities when approaching retirement is not exactly optimal, for several reasons:

  • It goes against the general principle of investment diversification that is critical to retirement plan investing
  • Risk is being taken at the time when retirement assets are typically at their highest, and there is the most to lose
  • There is a shorter time horizon to wait for the inevitable market rebound, and panic may cause some individuals to lock-in their losses and miss the rebound, like our example
  • Contributions are often less than they were when a participant was an active employee; in fact, withdrawals may be happening concurrently with market losses, thus locking in the losses and exacerbating the problem

So, let this year’s COVID-19 market volatility lesson be a message to those who are retiring or nearing retirement — do not put all your eggs in one basket - or even mostly in one basket!

Do you have any thoughts on investing at or near retirement age? Feel Feel free to let me know on LinkedIn, Twitter or at

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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