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Road to Retirement Shouldn't Be Paved With Stocks

NEW YORK ( BankingMyWay) -- Talk to any financial adviser about how to save for retirement and you'll get two instructions: save as much as you can, and focus on asset allocation -- your portfolio's diversification between stocks, bonds and cash.

But a new academic study finds this to be misplaced emphasis. Advisers should be preaching the bigger, more dependable benefits of working longer, trimming spending and planning on using a reverse mortgage, the research suggests.

On the plus side, this means many people have more control over their financial fate than they think, because they're less dependent on the whims of the stock market and can rely a bit more on safe holdings like bank savings that make it easier to sleep at night. The downside, of course, is that spending less and working to 70 isn't so appealing.

Researchers at the Center For Retirement Research at Boston College, Alicia H. Munnell, Natalia Orlova and Anthony Webb, ran three simulations to find out how different retirement strategies would benefit thousands of people who have been under study since the 1990s.

"Our answer from all three exercises suggests that the focus on asset allocation is misplaced," the study reports .

Traditionally, strategists have focused on investing and the value of having large allocations to stocks, which generally provide larger returns than bonds and cash. But the three researchers found that most people have such small investment portfolios -- less than $100,000 -- that bulking up on stocks has little benefit, especially given the risks stocks entail.

In contrast, working longer produces multiple benefits. By retiring at 67 or 70 instead of 62, the worker has five to eight fewer retirement years to finance, while also giving investments that extra time to grow.

In addition, the Social Security benefit is 75% larger if one starts at 70 rather than 62. For many people, Social Security is the largest source of retirement income.

A reverse mortgage can also be a lifesaver late in life, allowing a homeowner to tap home equity without having to sell or make loan payments. It's a strategy that you can learn more about -- the pros and the cons -- here and here .

Another strategy with a big payoff is to trim spending. A reduction during working years allows one to save more and benefit more from investment compounding. If the reduction continues in retirement, the retirement savings last longer. The researchers found that most people need about 80% as much income in retirement as they had just before retiring.

When taken by itself, the investment portfolio clearly benefits from a large allocation to stocks, especially for young and middle-aged investors who have plenty of time to ride out downturns. But this becomes less important when the investment portfolio is seen in the broader context of these other strategies.

"In fact," the researchers write, "an individual can offset the impact of a 2% [investment] return instead of a 6% return by retiring at 67 instead of 62."

Given the economic uncertainties and volatility in the stock market right now, investors who prefer less risk can feel a little better about keeping a bit more of their holdings in bank savings and other safe accounts.

But because interest earnings are so low, there's not much benefit in tying money up for the long term. A five-year certificate of deposit, for instance, yields a measly 1%. It's probably wiser to keep money in a savings, checking or money-market account, so it's available for a rainy day, or to be invested in some other way after conditions improve.

--By Jeff Brown

More on investing, saving and real estate:

A careful look at asset allocation tools

Where to keep a rainy day fund .

Using home equity in retirement .

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