A recent study shown by
Bankrate, which is a leading publisher of financial information that offers in
depth financial content, has shown that twenty-five percent of Americans favor
cash as a choice of investment that is needed for ten years or longer. Twenty-three
percent chose real estate as an investment choice, sixteen percent chose gold
or other metals that would have value while only fourteen percent would choose
stocks to invest in and eight percent in bonds. This shows that cash beat
stocks and real estate as a preferred long term investment.
Even though cash
seems like a great investment choice now, there are some retirement risks for current and future retirees. The biggest financial risk retiree’s face is outliving their money. It
is scary to know that a 3% rate of inflation will cut purchasing power of
assets in half within 24 years. Someone retiring after the age of 60, which is
currently the most common retirement age, would lose half their purchasing
power in their investment assets by the age of 90. It is also safe to assume
that one person in a couple will live to 90 or more, which means half their
purchasing of their investment. Social security and some governmental pensions
don’t include a cost of living increase provision
while
some COLA (cost of living adjustments) adjustments seem to lag inflation( which
would be more suitable in the future do to the current state of the federal
budget). Some retirees’ have it bad since some private companies don’t have COLA
provisions, so they are basically losing out to inflation from the first day. For
many retirees, a significant portion of their retirement cash flow comes from
withdrawals from their investments like taxable accounts, tax-deferred accounts
like 401(k)’s and IRA’s. If these accounts are invested in cash, then the
investments will lag inflation. On top of that adding taxes to these
withdrawals will wipe out their cash faster than thought. Risk tolerance is a
key factor in a balanced approach to retirement investments. Thus the ‘bucketing’
approach has been called upon which involves having liquid cash to ensure
spending needs, so that the retiree doesn't need to go into their equity holdings.
There are different types of buckets that can be used depending on your risk
tolerance. Some “buckets” might entail medium risk investments like bonds while
some “buckets” that are riskier might hold stocks for growth beyond inflation. According
to Bankrate, an average money-market deposit yields .11% so with an initial
investment of $10,000 one would only gain $110.55 in a ten year span which is
not much at all. Greg McBride, the senior financial analyst of Bankrate,
advises to invest more in the stock market since it is better in the long run. With
cash investments you’re going to earn a low return which may be riskier later
on. In the long run, safe investments like bonds
and cash will never protect an investor against the risk of inflation.
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