Better Safe Than Sorry

Howard has $950,000 in annuities in the market and $68,000 in an emergency fund. He's considering converting the stocks to a money market account to lower his risk. What would Dave do?

QUESTION: Howard in Illinois and his wife are almost 70 years old. Howard has $950,000 in annuities in the market and $68,000 in an emergency fund. He only owes on his home. He’s considering converting the stocks to a money market account to lower his risk. What would Dave do?

ANSWER: There are two sides to this. Side number one is the traditional financial planning theory, which is that as you get older, you move from equities like mutual funds over toward safer and calmer investments: bonds, money markets and certificates of deposit. That’s called an asset allocation method, and it is standard financial planning theory.

I pretty much disagree with that theory, and here’s why. The average male death age in the U.S. is 76, and the average female death age is 78. However, if you are 72 years old and you’re in decent health, you have a very high statistical likelihood of living into your 90s. We’ve got 20 years then. Now here’s the problem.

If you are making a 1% rate on your money market, and inflation is running 4% or 4.5%, by the time 20 years has gone by, your $1 million is really not going to be worth very much. It won’t have any buying power. You need to outpace inflation at least with your investments to break even.

I do want to see you have peace of mind and more stability than you probably have now, but the full-on asset allocation to put your $1 million into a money market and cut your income to almost comparatively nothing is drastic.

I might do some if you want to, and you can decide how much, and also decide about the types of mutual funds that you’re in. At age 72, I wouldn’t have you in an aggressive growth stock mutual fund. That’s too wild. But I might have some growth and income funds and some balanced funds in there with some money markets and CDs mixed in at some proportion.

But you want the whole group to at least be hitting the 4–5% range average over 20 years to at least break even with the cost of gas and bread going up. That’s how I look at it. I think you are giving up one kind of risk if you move it all over to money markets, but you’re taking on another kind of risk, and that is you’ll get tackled from behind by inflation.

Balance it out to where you get a little more sleep at night, but at a pace where this thing is not going to get hit from behind.

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