Investing with stocks: Part 3

By Gary Silverman, CFP®

Having too much of your money in stocks is bad. If you missed this column last week, now you know that was what we discovered. Today, I turn it around to look at a main reason why having too few stocks is equally bad: You might live.

A major part of my career is to help people plan on achieving and maintaining a financially comfortable retirement. They pay me the same whether I put all of their money into stocks or all of it into bonds, so I have no incentivized bias toward one or the other.

The main reason why stocks need to have a place in your retirement portfolio is that you might not drop dead as soon as you might like. My preference is to do retirement planning with the assumption that the client is going to live until age 100, if not longer. Most of my clients think this is ludicrous, but my reasoning is sound and based on actuarial studies. Actuaries are really boring people who like statistics. They work within the bowels of insurance companies, churning out data such as the odds you might have a heart attack while eating a grapefruit after drinking your coffee tomorrow morning. Their research is critical to an insurance company’s ability to make money.

Those actuaries tell me that if I have a couple entering retirement, there is a 50% chance that one of them is still breathing in their early 90s, and a 25% chance that person is still alive in their later 90s. If you think that there is no way you can live this long, that’s fine. We’ll just assume it is your spouse who does. That way you are free to drop dead whenever you want.

Now, if there is a 25% chance that someone is breathing at around age 97, then I’m guessing that they are still eating, wearing clothes, living inside, and lighting and cooling that inside with electricity. In other words, they are still spending money. So by golly, I better plan on having money for them to spend.

Another problem with living to a ripe old age: Things will cost more when you are 70 than when you are 50, and they will cost more when you are 90 than when you are 70. While you may not see your cost of living go up every year, I think we can agree that keeping you comfortable tends to cost more over time.

Then there’s one other itty-bitty problem. If you have investments and make money, Uncle Sam is going to want his cut.

In summary:

1. You (or your spouse) may live a long time;
2. You’ll need more money every year to live comfortably; and
3. Not only will you need to earn more each year, but you must also be able to cover the taxes on what you earn so that you have enough left over to afford your cost of living.

What does this have to do with stocks?

We’ll look at that next week.

This article was scheduled to be published in the Wichita Falls Times Record News on May 31, 2017.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.