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Can You Stop Buying Stocks?

If you're actively investing for your retirement, one of the most important dates in your plan is the day you can stop socking new money away to fund it. Once your retirement plan is adequately funded, there's no need to continue diverting your income to it. At that point, you can either cut back your hours or boost your lifestyle and simply let compounding work its wonders.

When can you stop saving?
That magic date depends on several factors. Key ones include:

  • What your ultimate target nest egg is.
  • How much you have socked away already.
  • What rate of return you can expect.
  • How long it is until you plan to retire.
  • How bad inflation will be between now and your retirement.

Once you have an idea how those factors affect your personal situation, it's fairly straightforward to figure out whether you've got enough to stop making new contributions. For instance, assume you'd like to retire on a cool $1 million of today's dollars and you think inflation will average around 3% annually between now and retirement. This chart shows you how much you need to have today, based on potential expected returns and time to retirement, to hit that target:

Years to Go

4% Returns

6% Returns

8% Returns

10% Returns

40

$679,447

$317,142

$150,155

$72,074

35

$713,076

$366,098

$190,314

$100,129

30

$748,370

$422,611

$241,215

$139,103

25

$785,411

$487,847

$305,729

$193,247

20

$824,286

$563,154

$387,498

$268,467

15

$865,084

$650,085

$491,136

$372,965

10

$907,902

$750,436

$622,493

$518,138

5

$952,839

$866,277

$788,982

$719,818

Unfortunately, it's not just a matter of hitting your target and then simply stopping. As the past few years remind us, stocks don't move up in a straight line. Indeed, they don't always move up at all. As you get closer to what the calendar calls your retirement date, you may want to shift your allocation more toward bonds. While that should reduce your volatility, it does also move you closer to the left hand side of that chart in terms of total long run potential returns.

What's the right balance?
Of course, the obvious problem with that chart is the decades of difference in the amount of time between the same dollar amounts on its left side and its right side. Ultimately, that means you'll likely have to keep your allocation on the more stock-heavy side of the chart, at least until your balance reaches the point where you can shift things around.

That does mean you might face the prospect of having to work a few more years to reach your goal, especially if the market moves against you late in your career. But when you compare that against the few extra decades you'd have to invest via a more conservative strategy from day one, you may find the trade off to be worth your while.

Mitigate your risk
That being said, investing in a broad fund -- one that tracks an overall market index (like the S&P 500), for instance -- can help protect you from the worst risks of stock investing. By getting you instant access to a large number companies across a broad swath of industries, investing in an index can protect you from problems facing any one company or industry.

For instance, the companies in the table below are all profitable businesses that help make up the S&P 500. Yet if you take a look at how their stocks have performed over the past decade, you can easily see that they've been all over the map:

Company

Market Cap
(in millions)

Trailing Earnings
(in millions)

Industry

10-Year
Return

ExxonMobil (NYSE: XOM  )

$314,150

$19,280

Major Integrated Oil & Gas

114.4%

Microsoft (Nasdaq: MSFT  )

$260,130

$16,260

Application Software

(34.7%)

General Electric (NYSE: GE  )

$195,680

$10,920

Conglomerates

(53.6%)

Wells Fargo (NYSE: WFC  )

$161,740

$7,990

Money Center Banks

103%

AT&T (NYSE: T  )

$154,870

$12,540

Telecom Services-Domestic

(5.1%)

Pfizer (NYSE: PFE  )

$138,330

$8,620

Drug Manufacturers-Major

(33.1%)

Coca-Cola (NYSE: KO  )

$125,980

$6,820

Beverages-Soft Drinks

46.2%

Data from Yahoo! Finance; returns calculated by comparing adjusted closing prices 3/26/00 to 3/26/2010.

The lesson from the table is that a broad index can protect you against being on the wrong end of an improperly allocated portfolio.

Even Warren Buffett -- one of the richest people on the planet, as well as arguably the world's greatest investor -- has admitting making investing mistakes in his life. One of his most prominent, for instance, was in not selling Coca-Cola when its shares were richly valued in the 1990s. Yet Buffett got rich by buying and owning stock in great companies. Not every investment worked out to his expectations, but as a whole and over time, they did.

Unless you've got Buffett-like levels of capital and time at your disposal, however, it's nearly a herculean effort to build a strong, diversified portfolio stock-by-stock-by-stock. But with a good index fund as your base, you can get both that diversification and the benefits of stock ownership without the hassle and risks of owning individual companies.

Begin with the end in mind
Once you understand the impact that your potential return rate has on how much money you have to accumulate to retire, the benefits of remaining invested in stocks become apparent. Dealing with the volatility that brings can be the difference between retiring within five years of your target or 25 years. At Motley Fool Rule Your Retirement, we can help you plan for the tradeoffs between time, money, and volatility that are an inevitable part of retirement investing.

If you're ready to design the path to get you from here to your successful retirement, then join us today. To see the tools, techniques, and team we provide to our members, click here to start your 30-day free trial. There's no obligation.

At the time of publication, Fool contributor Chuck Saletta owned shares of Microsoft and General Electric. Coca-Cola, Microsoft, and Pfizer are Motley Fool Inside Value picks. Coca-Cola is a Motley Fool Income Investor selection. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2010, at 5:04 PM, kal347 wrote:

    I'm surprised you treatment retirement date as a target to stop investing or stop managing as you have in the past. If you retire at 65, you expect to live 20-25 more years. That's a long time.

    If you have an investment strategy that has been working, stick with it so you can draw down a solid income stream without fear of running out of money. Retirement is not some end point. It is merely a sign post along the road of a lifetime of effective investing.

  • Report this Comment On April 06, 2010, at 8:31 PM, TMFBigFrog wrote:

    Hi kal347,

    I agree with you that virtually everyone will need to be invested somewhere for their entire lives, not just up until the day they retire.

    The thing is, though, that for most investors, there's a different strategy that's warranted based on whether they're in the "accumulation" phase or "draw down" phase of their retirement plans.

    One of the scariest concepts for most retirement focused investors is the prospect of running out of money before running out of life. A spry, healthy 65 year old who has been actively working and is considering whether to leave a job can probably work another 3-5 years if needed, but a 95 year old with no work experience in the last 30 years will likely have far fewer options for a job.

    Once you start withdrawing from your asset base to cover your living expenses, a down market can be a double-whammy against you, as you'd need pretty much the same amount of cash to cover your costs, but you'd have to sell more shares to get it. That leaves you with less to compound in the future and could cause you to run out of money before you run out of life.

    As a result, once you start living off your retirement assets, the risk of volatility will likely get significantly larger than it does when you're still accumulating money. So, in response, you may decide to shift to a bond & cash focused strategy. That's fine, but it's a trade-off that will likely lower your long-run potential returns. If you don't plan for that accordingly, you run the risk of trading one form of "running out of money early" for another.

    Regards,

    -Chuck

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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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