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In Your 50s? Design Portfolio for the Long Term

BERKELEY HEIGHTS, N.J. ( TheStreet) -- Many 50- and 60-year-olds look at the pot of money they've accumulated for retirement and think they can't afford to lose any. They have a very short-term investment perspective with minimal tolerance for risk, and given the market carnage of 2008 and early 2009, who could blame them?

Unfortunately, those taking this approach are unwittingly sabotaging their retirements, because they have focused solely on investment risk and are ignoring two others: inflation and longevity.

For most people, being 100% invested in cash is a sure-fire way to lose purchasing power and outlive their money.

What impact does inflation have on a retiree's standard of living? The long-term U.S. inflation rate is roughly 3%, which sounds relatively benign -- but for perspective, here is the impact a 3% annual inflation rate has on $100 of purchasing power over time:
  • 10 years: $74.40, or 26% decline
  • 15 years: $64.18, or 35% decline
  • 30 years: $41.19, or 58% decline

The next risk, longevity risk, is probably the most often underestimated by older workers and new retirees. For perspective, a married 65-year-old couple, neither of whom smokes, has a 50% chance that at least one will live to be 92. There is even a 30% chance one will make it to 96! So for a newly retired 65-year-old, a portfolio needs to be designed for a 30-year period.

For most people, being 100% invested in cash is a sure-fire way to lose purchasing power and outlive their money. From 1926 through 2008, Treasury bill returns have averaged just 3.7% per year. Subtract inflation of 3% and you get a 0.7% pretax return. After taking out income taxes there is not much left.

So how does one fight inflation and longevity risk? Those lucky enough to have an inflation-adjusted pension plan are way ahead of those who do not. Their pension and Social Security benefits will be received as long as they are alive, plus inflation increases.

Older people without an inflation-adjusted pension plan, though, need to have a portfolio designed to provide a real rate of investment return. Getting a real return is key to keeping up with inflation and making money last. The tradeoff for getting a real return is accepting some investment risk. Older people need to view investment risk in terms of a 30-year time frame rather than a single year.

To illustrate the huge difference in the minimum return of a one-year versus 20-year holding period, look at data from between 1926 and 2008, when for a 50% equity and 50% bond portfolio the worst one-year return was minus 24.7% in 1931. But the minimum return for the same portfolio using a 20-year holding period was 4.6% between 1929-48. Since most 50- and 60-year-olds are planning for a 25-plus-year retirement, the investment risk is a tradeoff they will have to make.

Clearly investment risk is a very real and unsettling risk for many older people. My advice is not to let investment risk outweigh the risks of outliving your money or having a declining standard of living.


Michael Maye is the founder and president of MJM Financial Advisors (, a registered investment advisory firm in Berkeley Heights, N.J. He is a member of the National Association of Personal Financial Advisors (NAPFA) and has been a speaker covering tax topics at NAPFA's national and regional conferences. Maye has also been a frequent contributor to the Star Ledger of New Jersey's "Biz Brain" and "Get With the Plan" articles. In addition to NAPFA, he is a member of Financial Planning Association, American Institute of Certified Public Accountants, New Jersey State Society of CPAs and the Estate Planning Council of Northern New Jersey.

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