When it comes to investing in retirement, people with the same savings and the same withdrawal strategies can have very different outcomes.
John Waggoner, money columnist and reporter for USA Today, demonstrates this with the following example:
Let’s say that every investor in a group had about $1 million invested in one of the biggest stock funds at midnight on Dec. 31, 1999, and each decided to withdraw $50,000 a year (a withdrawal rate of 5% a year, which is what financial planners recommend). The results, Waggoner says, would be very different. For example, those who invested in the American Funds Washington Mutual, the best-performing of the biggest funds, would have more than $1 million in their accounts at the end of 2013. But most investors wouldn’t be so lucky – the median balance of investors who put their money elsewhere in the largest stock funds would be $283,500.
Why such a bad scenario? The period between 2000 and 2013 includes two severe bear markets. Here are the lessons to be learned, according to Waggoner:
- Don’t put your money in hottest funds of the day.
- Don’t invest everything in stocks.
- Don’t withdraw stock funds in a bear market. Taking money out in a bear market amplifies your losses. Janus Twenty, for example, lost 32.4% in 2000, and a withdrawal of $50,000 would have inflated the loss to 35.9%.
Waggoner says that it helps to diversify away from stocks. You can invest in bonds, the usual diversification, but bonds these days could hurt your portfolio because of rising interest rates. Hard assets like gold and real estate can act as insurance against the unexpected.
Read John Waggoner’s full article here.
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Image by Benjamin Miller
Tags: gold investment, investing in retirement, retirement investing, stock market, stocks
