January 21, 2011, 3:07 pm
The One Big Catch With Retirement Investing
By TARA SIEGEL BERNARD
This week’s Your Money column looks at the frightening realities of investing for retirement. The conventional advice usually goes something like this: Save a respectable amount of your income, invest in a diversified portfolio, and you should be able to comfortably retire.
Sounds prudent, but Michael Kitces, director of research at Pinnacle Advisory Group, recently argued on his blog that that approach is a lot more speculative than most of us may realize.
The reason is that you’re relying on the market to push you to the finish line in the last decade before retirement. Why? Reaching your goal is highly dependent on the power of compounding — or the snowball effect, where your pile of money grows at a faster clip as more interest (or investment growth) grows on top of more interest. In fact, you’re relying on your savings, in real dollars and cents, to double during that homestretch. So if the markets perform poorly, you can miss your target by a long shot.
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What do you do? You can try to save more even earlier. But as Mr. Kitces points out, the standard advice is to save less early in your working life since you have more time. So you can find yourself in the same predicament of relying too much on market returns to double your money in the years leading up to retirement.
“That’s why this problem is so insidious,” he said. “It happens regardless of whether you save for 20, 30, 40 or 50 years, because we always calculate the recommended saving in a manner that requires the portfolio to double in the final stretch.”
We talk about some ways to deal with the uncertainty in the column, but there are no real easy answers. What would you add to the list?
