Growth stocks and growth mutual funds can fit into investment portfolios of people planning to retire in the coming few years, retirement experts say.
Growth stocks and growth mutual funds: Aren’t those for young people with decades until retirement?
Not necessarily. But getting pre-retirees to consider growth stocks and growth funds might be tough considering recent history.
With memories of the stock market’s sickening 40% plunge during the 2007-2009 recession still fresh for many, and this year’s wild markets a more recent example, there’s a real reluctance among some investors of any age to put their funds into anything that’s risky. A past survey by the FINRA Investment Education Foundation showed that just 21% of Americans are willing to take on risk with their investments.
Even so, some retirement experts say a little bit of or even significant risk is essential if investors don’t want to outlive their money. And with the same FINRA survey finding that 56% of Americans worry about running out of money in retirement, it seems logical to look into how much risk and what kind of risk future retirees should consider.
Growth stocks and growth mutual funds can fit into investment portfolios for people planning to retire in the coming few years, according to some retirement experts. However, this seems odd. Why would some retirement professionals advocate the risks of growth stocks when people are closing in on the “preservation of capitol” years? Perhaps because those same retirement pros are worried not just about the risks of the investments themselves but also about the risks of not reaching the goal. For some investors, this is the choice, not between the bad and the good, but between the bad and the less bad. Some retirement pros see the risks of growth stocks as the “less bad” compared to the risk of not meeting the dollar goal at or into retirement.
Pre-retirees and retirees who are looking for their portfolios to outpace the rate of inflation may want to consider including growth stocks as part of a diversified portfolio. However, investors should also take into consideration their own individual situation, including risk tolerance, objectives, and goals.
Consider a 60-year old investor, perhaps one of the many who’s reluctant to take on risk amid global events like the Ukraine war, supply chain issues, and surging inflation. She decides to stay safe and keep her retirement savings in bonds, cash, and CDs. With all of her money in lower-risk bond investments and savings instruments, she’s not counting on much, if any, growth of principal.
But if inflation were to average a typical 3%, the same investor who’s meeting her daily needs today with around $40,000 per year would need more than $72,000 per year in 20 years to have the same kind of living standard. Where is that additional money going to come from? Either the investor would have to cut back expenses or eat into her nest egg faster, putting her at risk of outliving her assets, and that’s when inflation is just 3%.
“Investors confuse safety with certainty,” financial planner Harold Evensky wrote in his 2015 book. “Putting your nest egg into insured CDs may offer the certainty that when they mature, you get your principal back with the promised interest; however, if expenses go up with inflation, over time your safe investment is likely to buy you less and less of the goods and services you need. This is called purchasing power erosion, and it’s one of the biggest risks retirees face.”
Growth stocks and growth mutual funds provide exposure to products that potentially could help investors keep up with inflation. For example, even with the dramatic global market swings since the COVID-19 pandemic, the annualized 10-year return for the S&P 500 Pure Growth index ($SP500PG) has been 12.63% as of early September 2022. The S&P 500 Bond index, described as the “corporate bond counterpart” to the S&P 500, posted an annualized return of 2.43% over the same period of time.
Evensky popularized an idea called “bucket” investing, in which pre-retirees put their funds in different buckets, with one for money needed immediately, another for moderate-term needs, and yet another for long-term investments that have the potential to grow and help the investor replace money coming out of the first two buckets. This potentially helps investors avoid that purchasing power erosion, according to Evensky. Growth stocks and growth mutual funds may fit into the third bucket for some investors.
Bucket investing, used properly, can also help investors get a better sense of their future needs and plan for retirement using an incremental approach. It’s a good way to visualize the money you will need in retirement in set time frames; for example, one to five, five to 10, and 10+ years. This way you can get more aggressive the further out you go and be more conservative with the money you may need sooner. It’s also important to review your retirement plan on a regular basis and reallocate as you deplete one bucket.
But how much should investors approaching retirement consider putting into riskier holdings like growth stocks and growth mutual funds? According to retirement experts, there’s no magic formula. Each investor is unique, and their circumstances, including how much they’ve been able to save, their expected Social Security income, their plans on when to retire, and the type of lifestyle they want to lead in retirement, can all help determine how much risk they need to take on.
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