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 to get an idea of how long your portfolio will have to last.

More about...Investing, Planning, Retirement

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