1

Investing too conservatively during retirement
Cost: $360,000 to $750,000

Conventional wisdom has long suggested that as retirees age, they should shift money out of stocks and into more stable investments, such as bonds. But the problem with bonds is that their annual returns may barely keep pace with inflation, while stocks, over time, typically provide returns significantly above inflation. And inflation can be a retiree's worst enemy.

The Consumer Reports Money Lab and Ibbotson Associates, a Chicago investment-research firm, analyzed how well a range of stock-and-bond portfolios would have performed, using data from 1940 through 2006. We assumed that our hypothetical investor retired at 65 with $500,000 in savings to invest. Some 17 percent of workers 55 and older say their households have saved that much for retirement, not including the value of their home or any defined-benefit pensions, according to a 2007 survey by the Employee Benefit Research Institute in Washington, D.C. We also assumed withdrawals at 3 percent each year during retirement and adjusted returns for inflation (as we did with other multiyear calculations in this report).

Overall, we found that an asset mix leaning more toward Standard & Poor's 500 stock index than bonds provided bigger returns and annual cash draws. On average, over a variety of 20- and 35-year periods from 1940 through 2006, an all-stock portfolio provided our investor with $750,000 more than an all-bond one. If we had started with less money, $250,000, the advantage of all stocks over all bonds was about $360,000.

What you can do. Weight your asset mix as heavily toward stocks as your comfort level allows. If all-stock gives you the willies, consider, for example, an 80/20 or 70/30 stock/bond mix.