March 31, 2023

Your Money: An Adage Adjustment for Investors at Retirement

Traditionally, retirees have been told to keep a significant slice — about 50 to 60 percent of their portfolio — in these risky assets, and that’s what many people tend to do. Then they hope and pray the stock market doesn’t plummet as it did in 2008 and 2009.

That’s why the results of a new study are so intriguing. It found that holding as little as 20 percent in stocks upon retirement, with the remainder in bonds, would result in a smoother ride during turbulent markets, and the money would last a few years longer.

There is a small catch. Retirees need to gradually buy more stocks over time, but they don’t necessarily end up owning much more than most retirees start out with.

“There are a lot of retirees in serious trouble because they bailed entirely in late 2008 or early 2009 because they couldn’t get comfortable with the volatility of a traditional portfolio,” said Michael Kitces, director of research at the Pinnacle Advisory Group, who wrote the study with Wade Pfau, a professor of retirement income at The American College of Financial Services.

Even though it usually pays to do nothing at all when the stock market dives, it is hard to blame retirees who cannot withstand that sort of gut-wrenching volatility. So they dump their stocks at the worst possible time — either because they’re afraid or because they need the money to live on — and lock in their losses. If a smaller slice of their retirement savings were bouncing around, it might have been easier to remain invested.

The approach outlined in the study is essentially the opposite of the traditional advice, which suggests keeping a steady mix of stock and bond funds throughout retirement or slowly lowering the amount of stocks. In fact, more than half of target-date funds for people nearing or in retirement continue to reduce stock positions over time, according to Morningstar.

Portfolios that started with about 20 to 40 percent in stocks at retirement, and then gradually increased to about 50 or 60 percent, lasted longer than those with static mixes or those that shed stocks over time, according to the study. (The average target-date retirement fund for people in and near retirement holds about 48.3 percent in stocks, according to Morningstar.)

This sort of approach makes logical sense because retirees are most vulnerable in the early years of their retirement. Why? If you experience a bear market shortly after you stop working, you need to make withdrawals when the portfolio is down. You’re selling at the worst possible time.

But if the market performs poorly later, say in the second half of retirement, the damage to the portfolio is far less severe because the money had several decent years first. In other words, the sequence of your returns matters, especially in retirement. “If you have a bad sequence of returns early in retirement, you would have a lower stock allocation when you are most vulnerable to losses,” Mr. Pfau said, referring to their approach.

The second piece of this strategy involves slowly increasing your exposure to stocks. The thinking here goes something like this: If a big crash occurs in the early years after you retired, you will essentially be buying stocks when they’re cheap. So by the time the market recovers, you’ll have a bigger slice of your money in stocks again. “It becomes a ‘heads you win, tails you don’t lose,’ situation,” explained Mr. Kitces.

More specifically, the study looked at how different mixes of stocks and bonds would affect how long a retiree’s money would last if that person initially withdrew 4 percent of total assets each year (and adjusted that amount each year thereafter for inflation). So, for a person with $1 million in retirement assets, that would translate to a $40,000 withdrawal the first year; for someone with $500,000 in savings, the withdrawal would be $20,000, and so forth.

They tested the different stock and bond allocations using a Monte Carlo analysis, which simulates thousands of situations to determine the odds of possible outcomes; they also analyzed how the different mixes would perform with three different sets of market returns after inflation. (They included average historical returns and today’s nonexistent bond yields and a 3.1 percent return for stocks, on average. The third set of returns assumed bonds generated 1.5 percent while stocks produced 3.4 percent.)

Even in a worst case, they found that new retirees who start with 30 percent in stocks and slowly increase that allocation by 1 percentage point a year to 60 or 70 percent in stocks would be able to withdraw 4 percent of their portfolio for about 30 years. Someone who held 60 percent in stocks and 40 percent in bonds over 30 years would run out of money two years earlier, but would also have to endure a bumpier ride, the researchers said. (These results assumes stocks will grow about 6.5 percent a year, on average and after inflation, while bonds will increase 2.4 percent).

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Off the Charts: For Markets, a Strong January Is a Good Sign

That maxim of the American stock market would seem to bode well for the market this year. The Standard Poor’s 500-stock index’s gain of 5 percent made the month the 12th best January since 1950, and the 19th opening month in that period when the index rose more than 4 percent.

“If history repeats, we would expect a double-digit percentage increase in the upcoming 11 months,” said Richard Peterson, an analyst at SP Capital IQ.

Only once since 1950 has the market fallen in the last 11 months of a year when it rose 4 percent or more in January. That was in 1987, which began with the best January in the history of the index — up 13.2 percent — and ended including the worst single day ever for the index, a 20 percent plunge on Oct. 19.

On average since 1950, January gains of at least 4 percent have been followed by rises of 15.1 percent in the remainder of the year. Gains were lower when January gains were smaller, and on average the market has made no headway in years after prices fell in January.

There is, of course, no guarantee that history will repeat. In fact, during the Great Depression the opposite pattern existed. The market rose sharply during the first month of 1929, 1930, 1931 and 1934, only to plunge the rest of each year. Prices fell in the first month of 1935, which turned out to be an excellent year.

The January gains this year reflected generally strong markets around the world. As can be seen in the accompanying charts, all but two of the 20 largest stock markets in the world rose in January, and six of them — Japan, China, Britain, Switzerland, Sweden and Italy — rose more rapidly than the American market did. The two that showed losses were Brazil and South Korea.

The ranking of markets is based on World Bank calculations of total market capitalization of each market in 2011. More than half the capitalization of those 20 markets is in just the top three, the United States, Japan and China. The top five — Britain and Canada in addition to the other three — have two-thirds of the value.

The United States market is one of 10 that have more than doubled from their credit crisis lows set in 2008 or 2009, the others being Brazil, Germany, India, South Korea, Hong Kong, South Africa, Russia, Sweden and Mexico.

The only three countries in the group that are not at least 50 percent higher than their lows are all in the euro zone, where economies have been stumbling. They are France, Spain and Italy.

Floyd Norris comments on finance and the economy at

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Bits Blog: Yahoo’s Mayer Gets Hefty Pay Package

Yahoo said in a regulatory filing on Thursday that it would pay Marissa Mayer, its new chief executive, a base salary of $1 million a year — and then some.

Ms. Mayer, 37, is eligible for a $2 million annual bonus if she meets the company’s financial targets and up to $4 million if she exceeds them. She will also receive $12 million in stock this year, half of it in the form of restricted stock, the remainder in options.

To make up for what she left on the table at Google, Yahoo will pay Ms. Mayer an additional $14 million in stock. And it is giving her $30 million in stock as a one-time “retention equity award,” vesting over a five-year period.

Yahoo is paying Ms. Mayer more than it initially offered her predecessor, Scott Thompson, who was offered a $1 million base salary, a $2 million bonus and a stock package worth $22.5 million.

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Bucks Blog: Financial Engines Offers New Advice Program for Pre-Retirees

If you’re nearing retirement, you’re probably aware of the anxiety-inducing task that lies ahead: figuring out how to replace your paycheck with a steady stream of income generated by your investments.

But now, more employers are beginning to offer ways to help you prepare for that eventuality while you’re still working. This year, Financial Engines — which employers hire to provide 401(k) investment advice to their employees — introduced a service whose goal is to protect your portfolio before you stop working  and to generate consistent monthly payments that can be deposited into your checking account after retirement.

“What we are doing is taking the person’s assets and structuring them so that it provides steady retirement income for the rest of their life,” said Christopher L. Jones, chief investment officer at Financial Engines.

Though the plan is somewhat customizable, the general model it starts from is as follows: You live on the income from your portfolio through age 85, and using another portion of your savings, you can buy an immediate annuity at any point up to age 85 that will allow you to collect that same level of income for the rest of your life.

The service, called Income+, is essentially an extension of the investment management the company already provides for employees during their working years. With Income+, however, your portfolio will gradually become more conservative as you approach retirement, similar to the way target-date funds work. So starting about five years before retirement, the company will gradually restructure your portfolio, shedding stocks and putting that money into some combination of bond funds available in your 401(k) plan. At that point, or about age 60, for instance, a typical portfolio might have about 58 percent invested in stock funds with the remainder in bonds.

But by the time you retire, say, age 65, about 20 percent of the portfolio would be invested in stock funds, with another 65 percent in fixed income. The remaining 15 percent would also be invested in bond funds, but it would be set aside for the eventual purchase of an annuity — if the retiree wanted one. There are no requirements to buy anything.

“Our goal is to produce steady income payments for 20 years and then enough money to buy an annuity to maintain that income for life,” Mr. Jones said. If  the annuity — which is bought outside of the 401(k) plan — is skipped, retirees usually have enough money to continue payments for another seven or eight years, he said, but then it will run out.

Once you’re ready to begin collecting income, the money would be deposited into a bank account each month. The payments are intended to rise enough to keep pace with inflation, or about 2.5 to 3 percent a year (that’s why a slice of your money is kept in stocks). But if the market performs poorly, your payments may remain steady that particular year. Likewise, if the market is on fire, your payment may increase a bit more. Generally speaking, though, as you age, the stock allocation will be reduced and that money will be reinvested into fixed income.

The only time your payment might decrease would be if you pulled out a big enough sum to pay for an unexpected expense, like repairing the roof or a medical issue. When Financial Engines tested the allocation in severe market downturns (like 2008), it said that the payments remained steady. But if the bond fund manager you’re using made a “catastrophically bad” investment choice, that could also your payments to decrease.

Roughly speaking, you can expect your annual payments to be about 4 percent of your portfolio. So in the current interest rate environment, a $500,000 portfolio might generate a little less than $20,000 a year, though that would generally increase over time.

Financial Engines said it could also help investors figure out if and when it made sense to buy an immediate annuity, where you give a pile of money to an insurance company in exchange for a lifetime stream of income that starts right away. (Financial Engines does not sell these products, nor does it make money on recommending them, but it can suggest a few providers).

Eventually, Mr. Jones said that the company may incorporate longevity insurance into its model, which is essentially an insurance policy that protects you against living much longer than you expected. Think of it as an immediate annuity that you buy at a discount since you pay for it in advance; the lifetime income payments don’t begin until much later (See my article and post for all the nitty-gritty details). Right now, the tax laws make this a less attractive option (I’ll spare you the details, at least for now), though Mr. Jones said he was optimistic that those tax rules would become more favorable in the foreseeable future.

It’s also important to note that Financial Engines acts as a fiduciary, which means it must act in customers’ best interest. And employees (or retirees) continue to have complete control over their money and can opt out of the program at any time — the company can continue to manage your money until you die, or you can decide to move everything into a rollover I.R.A. shortly after you retire. In fact, Mr. Jones said, the company would eventually like to offer this type of advice to I.R.A. investors, too.

Investors can contact Financial Engines’ trained representatives at any time with any questions. While they are all registered investment advisers, they are not necessarily certified financial planners, which is known as the gold standard in the planning world. “Because we are independent, we can help them with questions like, ‘When should I take Social Security?’ or ‘Should I take my pension income over time or should I take it as an annuity?,’ ” Mr. Jones said. “We can help them understand how all of the pieces come together.”

Naturally, all of this management comes at a cost (Financial Engines provides a discount for employers who automatically enroll their employees in the program, though workers are free to bow out). The service costs anywhere from 0.25 percent to 0.60 percent of assets, though the amount you pay is based on your account balance. If your plan offers low-cost index mutual funds from reputable providers, your total costs — for your investments and the advice — can be less than the cost of the average mutual fund.

Of course, if your employer’s plan offers only high-cost, actively managed funds, Financial Engines can only help you make the most of your limited options. But Mr. Jones said most of the companies it works with are large employers with solid investment choices, and it has advised those with weaker lineups to strengthen them.

But you’ll need to judge whether the investments in your plan are up to par, or whether you’re better off rolling the money over into an I.R.A. after you leave the company or retire. On the other hand, if you really like your 401(k) options, your employer might let you roll over money from something like a traditional I.R.A. and then Financial Engines could manage all of it.

Several employers with 401(k) plans run by Aon Hewitt and Mercer have signed up for the new service. In fact, Milacron, a plastics and machinery company, said it would automatically enroll its 401(k) participants over age 60.

What do you think of the new service? Would you use it? And if you are enrolled, let us know your experiences thus far.

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Economix: The Factory Age Isn’t Over

Mira Oberman/Agence France-Presse — Getty Images

The number of factories in the United States employing more than 1,000 workers fell by one-third from 1997 to 2007, leaving 1,014 such factories. This probably will not surprise you. The shattered windows of empty factories have become a familiar sight.

But a new study from the Federal Reserve Bank of Minneapolis puts an interesting twist on this familiar narrative. It reports that most of those factories did not close. They simply employ less people.

Of the factories that fell from the list of large employers, the study found that 48 percent still employed more than 500 people. Another 7 percent employed from 250 to 500 people. The remainder either had closed or employed fewer than 250 people.

The numbers predate the recession, making it likely that more of those factories have since closed or shed workers. But particularly at this moment, as millions of Americans struggle to find work, the study offers a reminder that our manufacturing base is to some extent a victim of its own success. In 1950, the United States Steel Corporation employed 30,000 workers at its plant in Gary, Ind. Today that factory employs only 5,000 workers. But they produce more steel: 7.5 million tons a year now, compared with 6 million tons then.

The study also includes an interesting list of new super factories, plants that employ at least 2,500 people. There were only 15 such factories. Four of them were built to make light trucks. Three were built to kill chickens. One makes guided missiles.

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