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Ignore this New York Times writer's terrible retirement advice

These 1991 Japanese traders had no idea that their stock market would continue declining for 20 years.
These 1991 Japanese traders had no idea that their stock market would continue declining for 20 years.

The conventional wisdom holds that people should put most of their retirement savings in stocks early in their careers but gradually shift to bonds (which offer lower returns but are less volatile) as they get closer to retirement. But New York Times contributor David Levine says that's nonsense — almost everyone, even those in their 50s, 60s, or older, should have all of their money in stocks.

This is really bad advice.

Levine's argument is pretty simple: Over the long run, stocks almost always outperform bonds. And while someone in his 60s obviously has a shorter life expectancy than someone in his 40s or 20s, he still has to plan for the possibility that he could live for another 30 or 40 years — long enough for the superior returns of stocks to manifest themselves.

But Levine's argument has two big flaws, and if you take his advice you're more likely to wind up running out of money during retirement.

Why stock market crashes are a bigger problem for older investors

Suppose you're 40 years old and you have 100 percent of your assets in stocks — a bit more aggressive than most financial advisers recommend, but not a crazy investment strategy for a 40-year-old. Suppose also that 2016 turns out to be a horrible year for the stock market, with shares losing 50 percent of their value by the end of the year.

Obviously this is going to be painful, but at age 40 it's not going to be the end of the world. You'll still have at least 20 years to rebuild your savings. And because you're (hopefully) still putting money away every month, lower stock prices will actually help you: You'll get twice as many shares per dollar as you got before the crash. If stock prices do eventually recover, the temporary decline in stock prices could even leave you with more shares in your portfolio than you would have had otherwise.

And in the worst-case scenario, you still have at least 20 years to figure out a plan B. That might mean tightening your belt a bit to save more, looking for a job that pays better, or delaying your retirement by a few years. None of these options is painless, of course, but they're all easier to do in your 40s than in your 50s or 60s.

Things look very different if you are a 65-year-old retiree with the same 100 percent stock portfolio. Suppose you had $1 million invested in stocks and were planning to spend 4 percent — $40,000 per year — a spending rate that's generally considered safe for someone living off investments.

If the stock market loses half its value, that same $40,000 spending rate is suddenly 8 percent of the portfolio value — a rate of spending that could rapidly deplete your savings and cause you to run out of money long before you die. Even if the stock market does eventually recover, you will have been burning through your savings so quickly that you'll be in a much worse position financially.

And adjusting to a down stock market is harder as a 65-year-old retiree than as a 40-something worker. You've already retired, so it's going to be more difficult to earn extra cash. And tightening your belt will be harder too: With no time for compounding interest to increase the value of your savings, your 65-year-old self is going to have to cut spending a lot more than your 40-year-old self would have.

In short, it becomes harder to cope with market volatility as you get older. That's not only because older people have a shorter time horizon — and therefore less time to wait for the market to recover — but also because younger people tend to be accumulating savings while older people tend to be drawing them down.

The stock market isn't guaranteed to go up

Levine's second big mistake is his claim that stocks always go up in the long run. It is true that over the past century there has never been a 20-year period when American stock market investors lost money. But as Levine himself acknowledges, the fact that US stock markets haven't yet had a downturn longer than 20 years doesn't prove this can never happen.

We have roughly 90 years of good data showing that stocks have outperformed bonds. That might seem like a lot, but as Levine acknowledges it's only 15 business cycles, or about three generations. The fact that none of the past 15 recessions were severe enough to produce a 20-year decline in the stock market doesn't guarantee that the next one won't be. Maybe we'll be less lucky than our parents, grandparents, and great-grandparents were.

Levine argues that the good performance of the US stock market is not just a coincidence. "Economic potential never drops because knowledge — the main source of per capita growth — always rises," he writes. Rising knowledge means that the economy will grow, business profits will increase, and stock market investors will ultimately make more and more money.

The problem with this argument is that it proves too much. It implies, for example, that a chart like this is impossible:

Nikkei 225 index.
Monaneko / Wikimedia Commons

That's Japan's stock market, which peaked near 39,000 in the late 1980s and then fell for the next 20 years. By early 2010, the country's benchmark Nikkei index was around 10,000, almost 75 percent below its value 20 years earlier. More recently, the Japanese stock market has rallied, and it's now around 16,000. But that's still less than half of the peak 26 years ago. A Japanese person who retired in 1989 with an all-stock portfolio would be in a terrible situation today.

And note that Japan's stock market didn't crash because the island nation suffered from a major war, natural disaster, or other catastrophe. Japanese workers are at least as smart, educated, and technologically advanced as they were 26 years ago. The Japanese economy simply failed to deliver on the rosy growth projections that had powered the country's bull market.

Will this happen in the United States? I think it probably won't. The US economy is more mature and diversified than the Japanese stock market was in the 1980s. But I don't really know, and neither does David Levine or anyone else.

So it's reckless for people in their 50s, 60s, or older to bet all their savings on the assumption that stocks always go up over 20 years. It's probably true, but not so certain that you should bet your life savings on it.

Instead, most older investors should follow standard investment advice: Put about half your portfolio in stocks and the other half in safer assets. History suggests that this portfolio will produce a lower return, on average, than an all-stock portfolio. But it's also a lot less likely to suffer a huge decline that could leave you penniless in your golden years.