Playing it 'safe' may delay retirement

The Baltimore Sun

Worried about market risk? How about inflation risk?

The recent stock market volatility might have you thinking about bonds, cash or other "safe" investments. But consider this: You'd better stash away a lot more money in your retirement and savings accounts.

Although bonds, money-market funds and other fixed-income investments generally do not have the stomach-churning volatility of stocks, they also don't have the same average returns over time.

"Amassing the amount of money you need for retirement is much harder to do with lower-returning investments such as bonds," said Todd Trubey, a mutual fund analyst at Morningstar Inc.

Let's say you're 30 years from retirement and have a portfolio that's 15 percent bonds and 85 percent stocks. You have $100,000 in a retirement account, sock away $500 a month and hope to amass $750,000 by retirement. You have a 62 percent chance of reaching your goal, according to Morningstar's asset-allocation calculator.

If you shift that allocation to half stocks, half bonds and cash, you won't see the same swings - but you'll cut your chance of hitting your goal by 16 percentage points. You'd have to save $675 a month to have the same chance of reaching $750,000.

"What price are you willing to pay for that comfort?" asks Jack Chite, a certified financial planner in Sayville, N.Y.

But the stock market's recent drop might be a wake-up call to review your asset allocation. If you haven't rebalanced your portfolio in recent years, you probably are too heavily invested in stocks because of the market's stellar run.

Now would be the time to sell some of the winners and buy other investments - which might include bonds - that haven't performed as well and are therefore underweighted in your portfolio.

If you truly can't handle the volatility of stocks or stock funds, Chite said, consider a growth-and-income fund, which has a mix of stocks and bonds. Or look at dividend-paying stocks, which offer returns based both on market performance and the dividend. If you decide you need to add bonds, Chite advised staying with short-term or intermediate-term issues so you don't lock yourself in for the long haul.

You also could consider value funds and large-cap stocks, which tend to be less volatile than others, Trubey said. Target-date retirement funds, which hold both bonds and stocks and become more conservative as you approach retirement, are another option.

But if you increase the bond holdings in your accounts, you'll need to adjust either your goal or your savings rate.

Tami Luhby writes for Newsday.

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