Consumer Reports’ Money Mistakes 1

I like a catchy headline, which is why I picked up Consumer Reports for the first time since purchasing a car a few years ago. Who would not want to know the “12 Money Mistakes That Could Cost You $1,000,000”? I can’t give away all of the mistakes, but two in particular should be shouted from the mountaintops across the nation.

According to the Consumer Reports “Money Lab”, the number one, costliest mistake that people make is investing too conservatively during retirement. I have seen this problem first-hand – as people retire, they abandon riskier assets like stocks and allocate much of their portfolio in bonds or cash. I always try to explain that for most people, this decision can be problematic. The reason is that the number one goal of retirement portfolio allocation is to keep pace and hopefully beat inflation. To do this, you probably need a broadly-diversified portfolio, which means that you can not abandon risk all together.

Conventional wisdom has long suggested that as retirees age, they should shift money out of stocks and into more stable investments, such as bonds or certificates of deposit (CDs). But the problem with that philosophy is that those safer instruments’ 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.Consumer Reports teamed up with investment-research firm Ibbotson Associates, to back test the idea of a diversified portfolio using data from 1940 through 2006. In the exercise, they assumed that the investor retired at 65 with $500,000 in savings to invest. They also factored in that the retiree would need to pull some money out of the portfolio at a rate of 3 percent each year during retirement and adjusted returns for inflation. The results were impressive: “we found that an asset mix leaning more toward Standard & Poor's 500 stock index than bonds provided bigger returns and annual cash draws…the team estimates that the cost of this mistake to people who are risk-averse to be in the range of $360,000 to $750,000.”

On some level you know this information, but it is difficult to stick to it, especially as the stock market meanders at these lower levels. But with CDs earning a paltry few percent and inflation on the rise, the alternative does not seem appealing. Tomorrow we’ll tackle another great Consumer Reports Money Mistake.