Stocks Are Less of Your Net Worth Than You Think! (Interesting Perspective)

[KoKo]

Stocks Are Less of Your Net Worth Than You Think
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by Jason Zweig
Tuesday, December 2, 2008provided byWSJ

If you are in or near retirement and can no longer withstand the agony of holding stocks, there is something to consider before you bail out.

No matter how much of your portfolio is in stocks, they amount to less of your net worth than you think. Let's assume you have $600,000 in stocks and $400,000 in bonds, even after the market meltdown. You are not 60% stocks, 40% bonds.
More from WSJ.com:

Here's why. Say you are a 65-year-old man; your life expectancy is 17 more years. You earned good money, and now you can expect a monthly Social Security payment of $2,000. At least for now, the U.S. government pledges that you will receive those payments, adjusted for inflation, for as long as you live. Having Social Security is equivalent to holding a bond that should produce $24,000 in today's purchasing power every year.

This kind of bond has a name: an inflation-adjusted immediate annuity. How big an annuity would match that $2,000 in Social Security each month? With the help of Allan Roth, a financial planner at Wealth Logic LLC in Colorado Springs, Colo., I was able to answer this question. It takes a $327,000 lifetime annuity -- assuming you bought it from Vanguard, an economical provider, at this week's rates -- to throw off $2,000 a month, after inflation, for the rest of your life.

Strictly speaking, this $327,000 implicit bond is on Uncle Sam's balance sheet, not yours -- but its income belongs to you. Effectively, that gives you a total bond position not of $400,000, but $727,000.

As a result, your $600,000 in stocks is not 60% of your assets; it's really 45% (since the annuity brings your total portfolio to $1,327,000).

The implicit bond of Social Security makes up about 40% of the total assets of the average household on the verge of retirement, according to Olivia Mitchell, director of the Pension Research Council in Philadelphia. "Having Social Security comprise such a big piece of the typical household's portfolio," says Prof. Mitchell, "makes recent equity-market losses, and home-value losses, relatively less critical."

The market meltdown may have scared you into wanting to cut back your stockholdings by 10% or 15%. But Uncle Sam already has done that for you automatically. Do you really need to do it again, just as the markets have declared the sale of the century on stocks?

Instead, consider these ideas on shoring up your retirement.

Work out your withdrawal rate. Most financial planners advise that you should safely be able to withdraw 4% of your accumulated savings each year in retirement. If you have $1 million in savings, that would amount to $40,000 to live on -- plus whatever Social Security (and your pension, if you have one) will provide. So, before you take drastic action, spend the time to total up your assets, then divide by 25 to estimate how much you can safely withdraw annually. That will give you a better handle on whether your situation is manageable. Normally you would bump the 4% up slightly each year to keep pace with inflation. Until the markets recover, skip the inflation step-up.

Work longer. If you are retirement age but still working, keep going. That will shorten the time over which you will need to support yourself from your retirement portfolio and boost your expected Social Security payments by about 8% a year after inflation, says senior financial planner Christine Fahlund of T. Rowe Price. Retire at age 67 instead of 62 and, in a typical scenario, you will reap annual Social Security benefits 50% higher.

pend the right money first. What if you do need to raise cash to live on? As a general rule, you will be better off cashing out of taxable money first and leaving your retirement holdings alone until you pass the age of 70½. Withdrawals from retirement accounts are taxed at federal rates up to 35%, while capital gains elsewhere are normally taxed at 15% or less. "You want to spend the money you've already paid taxes on," says Pittsburgh accountant and attorney James Lange. So, if you must sell stock to meet living expenses, harvest it from outside your IRA or 401(k).

Take baby steps. Finally, if stocks are making you miserable, then get out -- but gradually. Move no more than 10% of your stock portfolio into cash or Treasury inflation-protected securities, or TIPS. Wait one full month, then give yourself a gut check to see whether you want to move another 10%. By then, you may feel you can wait it out.

http://finance.yahoo.com/focus-retirement/article/106224/Stocks-Are-Less-of-Your-Net-Worth-Than-You-Think?mod=retirement-post-spending

[screembloodymurder]

1. Stocks were 40% of my net worth.

Now that 40% is worth half of what it was so ...

[razors edge]

2. All the men in my family die before 61.

I should get SS starting at 50.

[BeFree]

3. You're not talking to me...

...or i dare say 90% of us. We have no stocks.

My advice to those that do? Cash it in and give it away. Live simply, quit using so damn many resources. Share your stolen riches with your brothers and sisters.