RETIREMENT PLANNING : Why the 60/40 Portfolio May Fail You

What to do instead

You’ve probably heard of traditional “rules of thumb” in finance that are supposed to make retirement planning simple. After all, if they’ve worked for decades, isn’t that the safest bet?

Unfortunately, some of these have outworn their usefulness. The 60/40 portfolio is one of them. Even though it is still widely used in financial planning, it may endanger your future. That’s because it doesn’t consider one of the most significant issues today: longevity risk. Let’s look at the rules, the risks it presents, and what you can do to help protect your long-term finances.

What is the 60/40 rule?

The 60/40 rule is a decades-old idea that you should hold a percentage of stocks equal to about 100 minus your age. Then, the remaining money would be invested in bonds or other fixed income investments to minimize risk.

The gist of this rule is that you need to lower your exposure to stocks as you age because you might not have the time to recover from significant losses.

Why isn’t the 60/40 rule working anymore?

Surprisingly, the 60/40 isn’t dead because of last year’s twin failures in the stock and bond market. It fails because it isn’t appropriate for most people in or out of retirement. It should not be the de facto asset allocation recommended to most people by financial planners. But unfortunately, it is.

Most investors’ biggest risk is outliving their wealth. The 60/40 industry standard does not address that.

The risk of living a really long time

The 60/40 rule dictates that you downshift your risk early on. Here’s the problem. We are living in inflationary times. Your costs will likely be higher in the future. Possibly, dramatically higher. Then, there’s something else you can’t control; that’s how long you live.

Most people, and much of the financial industry, rely on actuarial tables to estimate how long they will live. But that’s only part of the story.

While the “average” person may pass away according to those tables, there are many outliers. Increasingly, if someone reaches an advanced age, they may live well past 90 or 100.

If you plan on living to 80, but you instead live to 98, that could mean you need a whole lot more money, precisely when you’re unable to go back to work. Inflation then exacerbates that, creating a potential financial catastrophe. And according to a recent Wall Street Journal article, “You Might Live Longer Than You Think, Your Finances May Not,” this is one the biggest mistakes made in retirement planning today.

Health care costs

The number one concern clients share with us as they approach retirement is paying for medical expenses during retirement. These costs can be extremely high- especially if some sort of long-term care is required later in life. Not only will your portfolio need to keep up with inflation during retirement, it will also need to provide for the likelihood of high medical costs. Maintaining a 60/40 portfolio could keep you from having enough to cover the healthcare that you might need.

Keep the foot on the gas pedal

So, that means you need to look far past the 60/40 rule when planning your retirement. Instead, you may want to maintain more exposure to assets that can keep up with inflation. That’s stocks. Instead of going underweight these risk assets, you may want to keep a good allocation to them well into your retirement years.

Yes, that means accepting more risk. However, that risk can be managed when your portfolio is structured appropriately. That way, you can keep your long-term return potential while minimizing the risk of a permanent loss of account value. After all, most portfolio risk is in the short term. If you stay invested for ten or more years and have sufficient cash available for the next few years’ worth of your living expenses, the chances that you will realize losses over the longer timeframe are relatively low.

Retirement planning is more than just a simple formula. The lesson here is that retirement planning today requires more than just a simple formula. That’s where the right kind of financial planning is vital. At Partnership Wealth Management, we use a ground-up approach that looks at your unique situation and analyzes your risks, including the potential for living a long time.

Yes, it requires more work than simply reverting to the 60/40 rule. However, the peace of mind you’ll gain usually far outweighs the additional time it takes for this comprehensive retirement planning.

Key takeaway – In today’s headline-driven markets, the risks from bank failures, interest rate changes, or Federal Reserve action feels real. But for many, the real danger is being too conservative with investments that need to provide income over the long term. By making this change to your retirement planning, you can plan for both a long and financially secure life.

Offered for informational purposes only, not as specific advice to any individual. As a Registered Investment Advisor (RIA), Partnership Wealth Management is committed to providing its clients with financial planning and wealth management services to help them work towards their financial goals. Partnership Wealth Management has a long history of working with the LGBT community with services such as financial planning and estate planning strategies. More at Partnershipwm.com.