Retirement Savings: Stick it in a Mattress?
Reuters blogger Felix Samon says (“Why people invest in stocks“) avoid the stock market like a plague.
For one thing, you have no good reason to expect an equity premium going forwards, and if there isn’t an equity premium, then your allocation to stocks should be tiny: you’re not being compensated for the extra risk you’re taking. On top of that is the question of volatility, which is not exactly the same as risk, but which again should be compensated for with higher returns, and isn’t.
My feeling is that people like to invest in stocks because they like knowing that there’s a chance that the stock market will solve all their financial problems when it rises. Think of it as a three-pronged strategy: buy a house, invest in stocks, and work hard. Any one of these three things can pay off with lots of money at retirement, in the way that investing in TIPS won’t.
What’s more, an entire generation of Americans started working and saving and buying a house in the early 1970s — and millions of them hit the trifecta, becoming successful in their careers even as their stocks rose and the value of their real-estate soared. I doubt that particular combination is going to happen again in the U.S., but the experience of that generation is so powerful as to give a lot of people a lot of hope. Even if that hope isn’t particularly rational.
The Atlantic‘s business and economics editor, Megan McArdle (“How to Save for Retirement in One Easy Step“) agrees.
If you’re saving a little bit in the expectation that your 401(k) will boom, your house will appreciate, and Social Security will support you, you may well end up in big trouble. Modern retirement planning should probably focus more on putting away an unreasonably large chunk of your income.
Granted that there’s no guarantee that stocks and housing prices will go up or that Social Security will still be there decades from now, those all strike me as a far safer bets than thinking I’ll be able to sock money away at a rate that will survive inflation.
If I were planning to retire in 10 or 15 years then, yes, I’d move a lot of my assets into low risk, high liquidity holdings. But, then, I’d have done that before the recent crash of housing and stock prices.
I’ve got another twenty-plus years, though, until I reach retirement age and, if my health holds up, I’ll probably work in some capacity well beyond that. So I’m expecting continued earnings to supplement my retirement strategy. But there’s no surefire way to make sure you don’t outlive your money.