How can I grow my retirement savings without too much risk?


— I’m 66 and have $170,000 to invest, but I don’t want to take a lot of risk with it. So how much should I invest in stocks and how much should I keep in bonds — and should I consider investing in an annuity? –E.H.

I get that once you near or enter retirement, you don’t want to do anything too risky on the investing front. After all, you don’t want to jeopardize the savings it took you a career to accumulate.

But you’ve also got to remember that there are different types of risk you need to protect yourself against. Most people, understandably enough, focus on the risk that they’ll lose money if they invest in stocks and the stock market subsequently goes into a deep slump. And if that were the only risk you had to worry about, you could easily avoid it by putting all your money in bonds or even in cash.

Doing that, however, would leave you vulnerable to another risk — the risk that the returns you earn are too low to provide the growth necessary for your savings to support you throughout a post-career life that could easily last well into your 90s. You could end up running out of money too quickly or, to avoid that possibility, find yourself forced to dramatically rein in your spending.

Which is to say that you really should be thinking not so much about avoiding risk altogether. That’s impossible. Rather, you should consider how you can balance different risks — in this case, the risk of seeing the value of your stash plummet in the short-term versus the possibility that your money may not be around long enough to support you for the long-term.

So how do you do that? You can start by completing this risk tolerance-asset allocation questionnaire from Vanguard. The tool suggests an appropriate mix of stocks and bonds. By clicking on the link to “other allocation mixes,” you can see how your recommended mix as well as others more conservative and more aggressive have performed on average over the past 90 years, including each stocks-bonds allocation’s best year, worst year and the number of years each mix has suffered a loss.

This is no guarantee of how a given mix of stocks and bonds will perform in the future. But it should give you an idea of how different allocations should fare relative to one another in the future, and certainly offer a sense of how much more (or less) volatility you can expect as you move more money into (or out of) stocks.

But don’t stop there. Presumably, if you haven’t started doing so already, you’re going to be drawing on your $170,000 for spending cash to supplement the income you’ll receive from Social Security. So in addition to guarding against outsize losses from stock market swoons, you’ll also want to ensure that the stocks-bonds mix you settle on doesn’t put you at risk of depleting your assets too early in retirement.

You can see how different stocks-bonds allocations are likely to hold up in the face of different levels of withdrawals by going to a tool like T. Rowe Price’s retirement income calculator. The calculator will estimate the probability that your savings will last until you’re 95. (Age 95 is the default setting, which I think is about right given today’s longer lifespans. But if you’d like to see your chances of living to various ages based on your current age and health status, you can check out this Longevity Illustrator tool).

By running a variety of different scenarios with different asset mixes and withdrawal rates, you can see how the chances of your money lasting throughout retirement might change as you invest more (or less) in stocks and raise (or lower) your withdrawal rate. And if you go through this exercise, what you’ll find is that you have pretty wide leeway in how you allocate your assets between stocks and bonds, provided you don’t overdo it on withdrawals from savings.

Generally, as long as you go with an initial withdrawal rate of 3% to 4% (and then adjust that initial withdrawal for inflation each year), you have a pretty good chance (roughly 75% to 80%) that your savings will last at least 30 years if you invest anywhere from, say, 30% to 70% in stocks.

You can invest more in stocks, if you think you can handle the volatility. But don’t expect that moving from a moderate allocation of stocks to a higher one (say, 80% or more) will necessarily increase the chances that you won’t run through your savings. The reason is that at some point the higher volatility that comes with stocks makes you much more vulnerable to market setbacks and can even begin to drag down the chances of your nest egg lasting 30 or more years.

In short, as long as you don’t go overboard on withdrawals, you can likely find an allocation that jibes with your tolerance for withstanding potential short-term losses due to market setbacks, and at the same time affords decent assurance that you won’t deplete your savings too soon.

Keep in mind, though, that we’re talking about estimates here, not promises. No tool or calculator can predict how the financial markets will behave in the future. So you need to be flexible about how you spend down your savings, perhaps dialing back the amount you withdraw after a market downturn or string of lousy returns and withdrawing more if the value of your nest egg begins to swell after several years of excellent investment performance.

If you want greater assurance that you’ll be able to rely on at least some income aside from Social Security and any pensions to support you throughout a long retirement, you might consider devoting a portion of your savings to an annuity.

There are lots of different types of annuities, some, such as variable annuities and fixed index annuities, marketed more heavily than others. But for retirees looking to ensure that they’ll have guaranteed income no matter how long they live and regardless of how the financial markets perform, I think an immediate annuity (which converts a lump sum into a lifetime stream of monthly payments that starts immediately) or a longevity annuity (which makes payments for life starting at some point in the future, say, 10 or 20 years down the road) is a simpler and better way to go.

You can get an estimate of how much monthly income you might receive from an immediate or longevity annuity based on your age, sex, the amount you invest and when you would like payments to begin by going to this annuity payment calculator.

That said, annuities, like all investments have downsides. To see whether you’re a likely candidate for one, check out this column that outlines their pros and cons for different situations.”

Finally, once you’ve arrived at a stocks-bonds mix that you feel is right for you, don’t change it just because your gut tells you stock prices are ready to tank (or soar to new highs). Instead, except for rebalancing occasionally or possibly shifting to a more conservative blend of stocks and bonds if you become more risk averse as you age, you should pretty much maintain the mix you arrived at after going through the exercise above.

Otherwise, you may run afoul of yet another risk: that far from improving your prospects, following your gut instinct will leave you worse off than you were before.