If You’re Scared to Invest in Stocks, You’re Scared of the Wrong Thing

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It was the early 90s, I was in my 30s and having to support a family of 4 on a $31,000 salary.

Although $31,000 went a lot further than it does today, it was challenging.

Finally, I managed to scrape together $1000 to set aside for retirement. It was time to decide how to allocate the investment.

Frankly, I knew next to nothing about any options beyond a savings account.

However, following a brief conversation with a younger colleague who was already investing through mutual funds, I decided I had to change that. To teach myself, I spent dozens of hours at the university library reading the Morningstar Mutual Fund Directory.

It was an eye-opening exercise.

It was immediately clear that unless I could set aside a lot more than I thought I’d ever be able to, I couldn’t expect to ever retire if my investments didn’t return a lot more than the interest of a savings account.

That meant taking on more risk in the short and intermediate term, but less risk in the long run, by allocating most or all of my investments to stock mutual funds.

Especially in the current situation, with the S&P 500 recently as much as 34% off its recent peak, and still more than 26% off that peak, investing in stocks seems scarier than it has been in a very long time.

If You’re Scared to Invest in Stocks, You’re Scared of the Wrong Thing

If you’re saving for a down payment on a house you plan to buy next year, investing in stocks is a BAD IDEA!

However, if you’re saving for retirement that’s decades away, stock market crashes are not the risk you need to be most concerned about. The more important risks are these two interrelated ones:

  • Not setting aside a large enough percentage of your income early enough
  • Not getting a return high enough to build wealth despite inflation

Setting Aside Enough Early Enough

When I was making $31,000, setting aside $1000 was a 3.2% savings rate.

That’s almost nothing!

The only good thing about it was that it was a starting point, and it was as much as I could do back then.

Conventional wisdom says you should set aside 10% toward retirement. However, once you take into account the impact of inflation, a 10% savings rate requires you to work for more than 50 years!

If you’re 22 and are willing to work until you’re in your mid-to-late 60s, you need to set aside at least 15% each year.

If you’re 40 and haven’t set aside anything for retirement, that fraction jumps to 35%!

Getting a High Enough Real Return

If you’re unwilling to take on short- and medium-term risk, you’ll limit yourself to low-return investments. For example, you might only invest in bonds. However, after adjusting for inflation, the long-term return for bonds has averaged less than 1.9% a year!

Compare that to the 6.5% average annual inflation-adjusted return for stocks!

Find Your Ideal Combination of Risk, Savings Rate, and How Long You Work

In the table below, you’ll see how many years you’ll need to work from the point you start investing for retirement based on your savings rate and how you allocate your investments between stocks and bonds.

How to Use the Table

First, calculate your retirement savings rate by dividing how much you set aside this past year for retirement into your total income. Find that rate in the lowest row of white-background numbers.

Next, find in the colored-background columns above your savings rate number the number of years you’re willing to continue working. If your savings-rate number is between two numbers, just interpolate between the two columns above those numbers.

Once you find that number of years, look to the number in the left-most white-background column of numbers in the same row. If the number of years you want to keep working is between two rows, interpolate between those rows.

For example, if your savings rate is 25%, you can take the average between the 20% and 30% columns.

If you’re willing to work another 29 years, your stock allocation would need to be between 80% and 90%, closer to 90%.

Number of years needed to invest for retirement based on your savings rate and stock allocation.

Things to Notice

Here are a few things you can see in the table.

  • If you’re unwilling to invest in stocks at all, and only set aside the 10% of conventional wisdom, you won’t be able to retire for more than 87 years!
  • If you only invest 5% of your income and want to live in retirement on the same 95% of income you’d be living on now, you’d need to work for over 54 years if you invest 100% in stocks, and more than 122 years if you invest solely in bonds. A typical 60/40 allocation would require working 68 years!
  • If you have nothing invested for retirement, are willing to keep working for the next 28 years, and want to invest using a relatively conservative 60/40 allocation, you’d need a retirement savings rate of just over 30%!
  • In general, the more conservative your investment allocation, the higher a savings rate you need for the same number of years of work.
  • Similarly, the higher your savings rate, the more conservative you can be for the same number of years.
  • Finally, the more aggressive your allocation and the higher your savings rate, the fewer years you have to keep working.

The Bottom Line

First, the extremely long-term (1928-2019) historic inflation-adjusted returns used in the table aren’t guaranteed to continue for the coming decades. However, they’re a reasonable starting point.

Next, going to the aggressive end of the allocation spectrum requires that you have the stomach to keep invested and avoid panic selling when, not if, the market crashes.

As we’ve experienced in the past few weeks, and will likely continue experiencing for the coming days, weeks, months, and possibly years, the stock market periodically loses a large fraction of its value. If this causes you to lose sleep and panic-sell, locking in losses, stay away from the 100%-stock allocation.

The result of that, as you can see in the table, is that you’ll need to work longer and/or be more frugal and invest a larger fraction of your income toward retirement.

It's important to learn about savings rates and allocations, and how the combination of the two determines if you'll ever be able to retire. Financial strategy is all about setting financial goals like retirement, crafting a plan to reach them, and doing what's needed to start implementing that plan in both your business and personal life. If you'd like to learn what this can help you accomplish, email me and we'll coordinate a free, no-strings-attached phone call to explore that possibility.


This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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