How Long You’ll Be Investing

A couple of weeks ago, I spoke to a group of elementary-school teachers about their 403(b) plan (the 401(k) equivalent for non-profit employers, in case you didn't know). Like most investors, they were a bit shell-shocked over what's happened over the past 20 months or so.

Many asked whether they should be contributing to their retirement accounts at all, given that the S&P 500 is still down approximately 40% from its October 2007 high, even after the rally we've seen since early March. It's understandable. By some metrics, the past decade has been even worse than what happened during the Great Depression.

My answer was, yes, you should still contribute to your retirement accounts. The tax breaks are just too good to pass up. Money you contribute to a traditional 401(k) or 403(b) reduces your taxable income, so it's essentially a tax deduction. Plus, you don't pay taxes on any interest, dividends, or gains until you withdraw the money in retirement. That's known as tax-deferred growth, and ends up providing more money in retirement.

Now, if your boss doesn't match your contributions to the company plan, you might be better off in a Roth IRA, which doesn't give you a tax break today, but gives you one in retirement. Whichever account you choose, you should still keep saving; it's the only way you'll be able to retire. If you can't stand the volatility of the stock market, invest in bonds or even cash. Just keep saving!

Stocks for the Really Long Run
That said, I do think most investors should have some of their money in stocks. Especially the 30-something teacher who told me that she couldn't stand seeing her account balance drop, drop, and drop last fall, so she sold everything and has been in cash ever since. Again, I understand — it's not easy watching years of savings seemingly disappear in a matter of months. But it's important to remember that investment success isn't based on how much you have right now, but how much you'll have when you need it. Staying too conservative for too long can increase the chances that you'll come up short.

The truth is, folks, your investment time horizon might be longer than you think. Let's assume the teacher I met is 35 years old and plans to retire at 65. That's 30 years of investing ahead of her. But she won't sell all her investments on the day she retires.

Sure, she should have at least 40% of her money in bonds at that point — and perhaps even more, if she's more conservative — but she can't play it too safe. Because at age 65, the average woman lives another 20 years; the average 65-year-old dude lasts another 17 years. Marriage actually increases the chances that one spouse will make it even five years longer (my wife doesn't believe it). And those are the averages; half of the population will live longer.

Add in lengthening life expectancies, and our 35-year-old teacher could reasonably expect to be living — and investing — well into her 90s. Of course, by then she should be playing it very safe, perhaps with only 10% to 20% of her assets in stocks. But it means that a stock (or mutual fund) that she buys today could still be in her portfolio by the year 2070.

Historically, with a timeframe that long, stocks have been the investment of choice. The chart below indicates how often from 1871 to 2006 that stocks beat bonds over various holding periods, courtesy of the fourth edition of Jeremy Siegel's classic Stocks for the Long Run.

If 2007 and 2008 were included in these numbers, all those percentages would be lower, including a 30-year period when bonds beat stocks (assuming that the bonds used were long-term Treasuries). So I'm definitely not saying that stocks are riskless investments as long as you hold on long enough.

But I still find the historical odds very compelling, especially for a multi-decade investment time horizon. And let's face it: Most of us will need stock-like returns to be able to retire and ensure that our portfolio keeps up with inflation over such a long timeframe. But that's a topic for a future article.

In the meantime, have some fun (or grim reality) with the longevity calculator at www.livingto100.com to get an idea of how long your portfolio will have to last.

More about...Investing, Planning, Retirement

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K. Marie
K. Marie
11 years ago

Don’t forget that many plans now offer Roth 401(k) or Roth 403(b) deferrals — if your plan doesn’t, you should be asking your plan administrator why not. The great advantage is that you can defer up to the 402(g) limit in either or a combination of both.

The other main thing to look at would be fees. If you have a “good” plan — the expense ratios in institutional share classes should be lower than retail share classes.

Also, who is paying the plan fees? Plan participants or the plan sponsor?

JerichoHill
JerichoHill
11 years ago

If one believes in what Aubrey De Grey talks about at TED, we may be living ALOT longer than we think. We should always be investing, but I also think we’re seeing a shift into changing what retirement actually means.

Tyler@FrugallyGreen
11 years ago

Do you find that most of the people you speak to understand the concept of buying more in a down market to increase future earnings or is it pretty common for most to panic and sell when their portfolios are down?

I guess that would just be another symptom of emotional investing. How do you coach people on avoiding that?

Moneymonk
Moneymonk
11 years ago

I like 401K for the tax shelter not much else Most of my 401k in is cash.

Chett
Chett
11 years ago

Robert, I teach, and the 403b plan that my district offers does not come with any type of match. In fact I don’t know of a district around that offers a match on the 403b contributions. If that is the case in your situation, did you recommend to these teachers they should convert their retirement account to an IRA and then later do a Roth conversion, or did you tell them to keep socking money away in the 403b? I don’t really see the advantage of a 403b, since most people in the education field don’t need to worry about… Read more »

CamKC
CamKC
11 years ago

Thinking that simply the passage of decades of time will guarantee a considerably fatter pot of money at the end than at the beginning is pure wishful thinking, yet there’s a collective dream that such patience must inevitably be rewarded. “We’ve left our money in the market for 40 years, surely we deserve a fat return” seems to be the group-think. What is so one-sided about this “investment hopefulness” is the idea that you keep buying through the 40 years and then liquidate the entire portfolio the day before you retire. Objectively, though, why should the index be higher than… Read more »

Kristin @ klingtocash
Kristin @ klingtocash
11 years ago

I actually wrote about this on my blog yesterday. According to Living to 100, I’m going to live t0 92. According to the CDC, if you live to 65, you’ll probably make it to 85. I don’t think most American’s are actually planning for this. Yesterday’s blog post also has a great calculator to see how much you need to put away to have the kind of lifestyle you’ll need. Check it out if you have a minute.

Robert Brokamp
Robert Brokamp
11 years ago

Howdy, folks. A few replies to your thoughtful comments/questions: To [email protected]: My experience is that there’s a wide range of reactions to market declines. The people who truly see them as an opportunity to buy stocks cheaper are the minority. For those who want to panic and sell, the main counter-argument is history; before the 2000s, stocks eventually recovered after every crash. But I do think it’s important to point out that there are no guarantees, and to cite examples like the Japanese stock market, which is still down 75% from its 1990 peak. Some people just can’t live with… Read more »

Cely
Cely
11 years ago

Well I’m apparently going to live to 102! Most of my family members are/were long-lived so I have always planned to live into my 90s. I started saving for retirement in my late 20s and I am still worried it won’t be enough.

Ross Williams
Ross Williams
11 years ago

“Objectively, though, why should the index be higher than 40 years ago on that particular day?” Because the average business is likely to be more productive 40 years from now. Of course, there is no guarantee of that. But if productivity remains the same or declines, there are not going to be many shelters from the storm of consequences that result from that. Its doubtful that whatever happens to the stock price in the next six months, or even six years, will make much difference in how much money a 35 year old receives for it in 30 or 40… Read more »

StackingCash
StackingCash
11 years ago

CamKC’s post is excellent. Investing is not as easy as buy and hold. The numbers given out are very deceiving and the history of the stock market does not guarantee anything. Might as well go to Las Vegas. I’m tired of hearing that stocks yield more for the long term. What about stocks that go bankrupt??? I still feel the stock market is where people give money to CEO’s to afford their criminal salaries and bonuses. Even I’m not secure anymore with just cash because I feel the value of my cash will decline like the American Empire is declining.

Rob Bennett
Rob Bennett
11 years ago

Just because you will not be retiring for 30 years does not mean that stock losses do not have a big effect on your life in all the years before retirement. If you have less in your portfolio, you might not be able to afford to start your own business or move into the house of your dreams or take a great vacation that you would not forget. Plus, it causes stress to see much of your life savings washed down the drain. When we are trying to save, the experts tell us that each dollar counts because of compounding… Read more »

Ross Williams
Ross Williams
11 years ago

“Plus, it causes stress to see much of your life savings washed down the drain.” I think that pretty much sums up most of the misconceptions about investments: 1) You haven’t made any money until you sell, you also haven’t lost any money until you sell. A lot of people are under water on their home mortgage because they decided to “take cash out” of their house without selling it. 2) Investments are not “savings”. You bought stock in a company or loaned it money by buying their bonds. Its the same as if you invested it in your own… Read more »

kk
kk
11 years ago

While I agree in theory with all that this post says, sometimes I wonder about this advice. My folks took the uber-long retirement view, saved every spare penny, and built up a nice nest egg. However, my dad ended up passing away and then my mom soon afterwards. Both were in the 50-60 year old range, and hence never made it to retirement. While I am thankful for their saving, as ultimately I became one of the beneficiaries (along with my siblings) of their efforts and also of the ethic that they passed on, I often wish they had spent… Read more »

Luke O'Rafferty
Luke O'Rafferty
11 years ago

Just a quick comment. The line:

“And those are the averages; half of the population will live longer.”

Is misleading and probably incorrect. True if you are talking about medians but it is highly unlikely that the mean (which is usually what is meant by average) sits at the exact mid point of the distribution.

Such a blasé assumption, dismissing basic maths makes me sceptical about the rest of the advice. A bit more thought next time please.

E
E
11 years ago

kk, that is my husband’s very argument as to why he’s 50 and has no savings. He might get hit by a bus tomorrow. That’s true but the bus might only leave him disabled. Would you rather need it and not have it or have it and not need it? Personally I would rather plan to live to 100; then if I die at 50, I can leave my money to some person or cause I value and they can have the benefit. I haven’t lost nearly as much by being prepared as I would lose by NOT being prepared.… Read more »

kk
kk
11 years ago

E- Thanks for your response. Please don’t get me wrong, I think it is important to plan for the future. I am actually in agreement with you. My issue is more with financial planners who seem to think “retirement” is the only financial goal a person might have. This is unreasonable and dangerous. It is also conveniently best for the financial planner because it keeps all of your funds invested with the financial planner into perpetuity. A better financial planner will ask the client about their financial goals, and then work with the client to achieve the client’s financial goals.… Read more »

Dave Shafer
Dave Shafer
10 years ago

Unusually great posts. Here are some facts: Bonds out perform stocks more often than the opposite. In fact bonds outperform stocks for extremely long runs. The difference is that when stocks go on their runs they outperform bonds by a large amount. The vast majority of actual $$$ invested by folks occurs in a small amount of time between age 40 and 60. The sequence of returns matters hugely on the success of the buy and hold strategy and that is a matter of luck. The single most important characteristic for successful investing is the value approach which looks at… Read more »

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